offshore rmb express - bank of china

Offshore RMBExpress

Issue 76 ‧June 2020

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

6

1

Editors：

Lynn ZhangTel ：+852 2826 6586Email : [email protected]

Sharon TsangTel ：+852 2826 6763Email: [email protected]

Matthew LeungTel：+ 852 3982 7177 Email: [email protected]

10

Market Review

Offshore RMB Express 1

The offshore RMB market is under short-term pressureAffected by Covid-19 and the deterioration of China-U.S. relations, the RMB exchangerate depreciated significantly in May and broke the lowest point in September last yearat the end of the month. Major offshore RMB business indicators retreated from the highlevel, but still recorded substantial YoY increases. Foreign investments in China’s bondmarket accelerated, and the average daily trading volume under the Bond Connectreached a new high. PBOC has abolished QFII/RQFII quota restrictions to furtherfacilitate foreign investors’ participation in China’s financial markets.

I. RMB exchange rate in Maydepreciated after consolidation at lowlevelThe novel coronavirus (Covid-19) outbreak

that basically brought under control in China,

coupled with improving Purchasing

Managers' Index (PMI) and exports, have

strengthened market confidence. RMB

exchange rate hovered at 7.10 level in early

May. In mid-May, frictions between China

and the United States had intensified. U.S.

President Donald Trump stoked risk aversion

by saying he is less interested in trade deals

with China. As a result, RMB depreciated,

with CNH and CNY hitting 7.196 and 7.179

at their lowest levels, breaking the lowest

points set in September last year. By the end

of May, the DXY index fell back to around 98

level, and RMB stabilized at relatively low

level. If the relations between two countries

are not handled effectively, the possibility of

further RMB (especially CNH) weakening

cannot be ruled out. As of May 29, the

RMB’s central parity rate against the USD

closed at 7.1316, down by 0.9% MoM, down

by 2.4% compared to beginning of the year.

CNH closed at 7.1332, down by 0.5% MoM,

down by 2.4% compared to beginning of the

year. CNY closed at 7.1365, down by 0.7%

MoM, down by 2.5% compared to beginning

of the year.

The impact of Covid-19 on the economy and

financial markets is difficult to predict,

increasing the uncertainty of the RMB

exchange rates. In addition, more than 400

Chinese companies in Hong Kong plan to

pay dividends from May to September this

year. Chinese corporate dividends are

expected to rise by more than 20%

compared with last year, and the total

amount is estimated to reach approximately

HKD448.1 billion. If Chinese enterprises pay

offshore dividend payments through selling

RMB, it might further drag down the RMB

exchange rates.

Market Review

Offshore RMB Express2

There was a slight upward trend in

CNHHIBOR at the end of May, As of May 29,

the O/N, 1-week and 3-month CNH HIBOR

rates were 2.1602%, 2.4408% and 2.6232%

respectively.

II. Major offshore RMB businessindicators dropped slightly

By the end of April 2020, RMB deposits in

Hong Kong amounted to RMB654.3 billion,

down by 1.5% MoM and up by 6.9% YoY.

RMB loans outstanding in Hong Kong were

RMB161.2 billion, up by 2.2% MoM and up

by 45.2% YoY. The total remittance of RMB

for cross-border trade settlement was

RMB540.2 billion in April, down by 16.3%

MoM after breaking a 3-year high last month,

still up by 28.4% YoY. RTGS turnover was

RMB21.3 trillion in May 2020, down by 3.2%

MoM. As of May 2020, dim sum bond

issuance amounted to RMB73.0 billion

(including RMB70 billion of central bank bills).

According to SWIFT report in April 2020, the

RMB was the sixth most active currency for

domestic and international payments by

value, with a share of 1.66%, behind USD,

EUR, GBP, JPY and CAS. RMB payments

value decreased by 25.1% compared to the

previous month, while in general all

payments currencies decreased by 16.6%.

III. Foreign institutions continued to

increase China bond holdings,average daily trading volume of BondConnect reached a new high

There was a sharp decline in global bond

yields due to global central banks

maintaining loose monetary policies,

widening spreads between China and foreign

countries, and attracting foreign investors to

increase their holdings in RMB bonds (3-year

China government bond yield was about 120

basis points above 3-year U.S. government

bond yield as of the end of April). As of April

2020, foreign holdings in Chinese bonds

reached RMB2.31 trillion, increasing

significantly by 31% YoY, with a monthly net

inflow of RMB50.4 billion. With the Chinese

bond market continuing to open up, foreign

investment in Chinese bonds accounts for

2.5% of total market share, and the share is

expected to grow further in future.

In May, trading tickets totaled 5824 for the

month, while trading volume and average

daily turnover reached RMB468.2 billion and

RMB26 billion respectively. Policy bank

bonds, Chinese government bonds and

NCDs drew the most interests, accounting

for 51%, 32%, and 14% of the monthly

trading volume. Local government bonds

trading totaled RMB8.6 billion in May, more

than 6.6 times increase YoY. In the same

month, the scheme welcomed 68 new

investors, and expanded its coverage to 32

Market Review


jurisdictions across the globe with 1,951

global institutional investors, including 70 of

the top 100 global asset management

companies.

Since this year, increasingly rising interest is

witnessed from pension funds. Out of the

global top 100 pension funds, Bond Connect

has onboarded 20 and more are in the

pipeline.

IV. The Restrictions on QFII/RQFIIquota lifted by PBOC

On May 7, the People’s Bank of China and

the State Administration of Foreign

Exchange issued the “Provisions on the

Management of Overseas Institutional

Investors’ Investment Funds in Domestic

securities and futures”, specifying and

enhancing requirements for investment funds

of overseas institutional investors in domestic

securities and futures, including the abolition

the quota limit of QFII/RQFII, the integration

of local and foreign currency. With the

liberalization of investment quota restrictions,

more foreign investors would be attracted to

invest in China’s capital market, maintaining

the trend of net capital inflow.

Policy and Peers Updates


A financial support guideline for the development of the Guangdong-Hong Kong-Macao

Greater Bay Area has been issued, the central bank said on May 14th. The guideline was

jointly issued by the People's Bank of China, the China Banking and Insurance Regulatory

Commission, the China Securities Regulatory Commission, and the State Administration

of Foreign Exchange. The guideline put forward 26 specific measures for these five areas:

promoting the Greater Bay Area's cross-border trade and facilitating investment and

financing, expanding the opening-up of the financial sector, promoting the connectivity of

financial markets and financial infrastructure, boosting innovation of the Greater Bay

Area's financial services, and preventing cross-border financial risks.

Under the measures, pilot schemes would be started for qualified foreign limited partner,

qualified domestic limited partner, and qualified domestic investment enterprises, enabling

institutional investors in Hong Kong and Macao to participate in private equity and venture

capital funds in the Greater Bay Area through the QFLP scheme, said a statement on the

PBOC website. The guidelines also called for the setting up of funds for key projects in the

Greater Bay Area, allowing capital from insurance firms and bank's wealth management

units in the Chinese mainland and the two SARs to participate.

In the banking sector, a joint account system combining Chinese and foreign currencies is

in the pipeline to promote cross-border trade and investment in the area. Local residents

will be able to invest in wealth management products issued by mainland, Hong Kong and

Macao lenders.

In addition, a Guangdong-Hong Kong-Macao Greater Bay Area international commercial

bank will be set up in the Guangdong Pilot Free Trade Zone, regulators said. Commercial

banks will be encouraged to set up financial asset investment companies and wealth

management companies in the area, without any caps on foreign ownership.

The guideline is expected to deepen the mainland's financial cooperation with Hong Kong

and Macao, enhance the role of the Greater Bay Area in supporting and leading the

country's economic development and opening-up, and provide strong financial support for

building a dynamic and internationally competitive first-class bay area and a world-class

city cluster, the central bank said.

China boosts financial support for Greater Bay Area

Policy and Peers Updates


SAFE: China's cross-border capital inflow resumed in April

China's banking sector posted a foreign exchange surplus of USD14.8 billion in April,

according to data released by SAFE on May 22. Non-banking sector (e.g. individuals and

enterprises etc.) recorded a foreign exchange surplus of USD4.9 billion in April (deficit in

March). In April, net inflows under cross-border securities investment resumed, with

foreign investors adding a net USD18.9 billion to their holdings of domestic bonds and

listed stocks.

BOCHK Phnom Penh Branch became CIFM memberAccording to PBOC announcement on June 1, Bank of China (Hong Kong) Limited,

Phnom Penh Branch, was approved to become a member of the China Inter-bank

Foreign Exchange Market and to conduct regional FX transactions between Yuan and

Riel.

Special Topics


The offshore RMB market has witnessed

significant changes. Market uncertainties

continue to pose pressure on the RMB

exchange rate. On May 27, CNH was further

depreciated to near 7.2 level.

I. In the short term, the RMB exchange

rate faces new uncertainties

Due to Covid-19, global financial market

volatility has accelerated significantly since

February this year, global risk aversion soared,

and USD has become a major safe-haven

asset sought by investors. RMB has moved in

the same direction as other major

international and emerging market currencies

such as the Euro, JPY and GBP. Since

Wuhan and Hubei province saw an increasing

number of confirmed cases around the

Chinese New Year festival, the Chinese

Government has imposed strict quarantine

and social distancing measures. Hence, the

economic impact was realized earlier than

that of other countries. The main economic

indicators released in early March has been

reversed, and CNH and CNY fell to a range

between 7 and 7.1, after testing 7.15.

While Covid-19 in China was basically under

control in mid-March, the outbreak outside

China has worsened, especially after Italy,

France and Germany become new epidemic

centres. Global risk aversion was activated,

and the RMB exchange rate was adjusted in

line with the market. However, after the

outbreak was brought under control in early

April, China made great efforts in promoting

the resumption of work and production, the

PMI and exports improved, which enhanced

market confidence and helped to stabilize the

RMB exchange rate in late May.

When the 10th National People’s Congress

reviewed the draft decision on HK national

security legislation, Trump said he would

respond “very strongly”. On May 27, CNH and

CNY reached 7.196 and 7.179 at their lowest

levels, breaking the low points of China-U.S.

trade friction reached last September.

II. Cross-border RMB flows pose direct

impact on exchange ratesWhile China actively promotes the use of

RMB as an international currency, cross-

border RMB flow has been changing, which

impacts the trend of RMB exchange rates,

causing deviations both onshore and offshore.

The cause of recent RMB exchange rate fluctuations and future prospectsYing Jian, Senior Economist

Special Topic


As early as 2013-14, the market had a strong

anticipation of RMB appreciation. The

demand for RMB continued to rise in the

offshore market, leading to a relatively large

gap between CNH and CNY. Some

companies in Hong Kong used RMB to settle

their exports to the Mainland, which formed a

large amount of RMB capital outflow from

the Mainland to Hong Kong, leading to

arbitrage between CNY and CNH. On the

other hand, the market believed that the

RMB would further appreciate, holding RMB

and increasing RMB assets, further

contributing to the appreciation of the RMB.

After the exchange rate reform regime on

August 11 2015, cross-border RMB flows

reversed. The RMB exchange rate changed

from appreciation to depreciation. CNH

depreciated at a larger degree than CNY.

Importers in Hong Kong used more RMB as

settlement currency for reverse arbitrage. As

China’s regulatory authorities strengthened

the management of FX purchase and sale

transactions, it became difficult to buy foreign

currencies under capital account and current

accounts. Some enterprises paid in RMB

and converted large amount of USD offshore,

which exacerbated the depreciation of CNH

and increased the difficulty of macro-control.

What is the recent cross-border RMB flow

situation and what impact will it have on the

RMB exchange rate?

First, there are some new characteristics for

cross-border RMB flow. With the inclusion of

RMB into SDR basket and becoming an

international reserve currency, the reserve

and investment functions of RMB have

increased significantly. Global central banks

and institutional investors have been

increasing RMB assets holdings in recent

years according to diversification and asset

allocation needs, which has produced a

demonstration effect for other institutional

and individual investors. On the other hand,

the RMB exchange rate remained stable

thanks to widening interest rate spreads

between China and the United States. RMB

assets enjoy a relatively ideal rate of return,

increasing the attractiveness of the RMB.

China capital markets continued to open up,

introducing stock and bond connect,

facilitating overseas investors to buy the

RMB stocks and bonds. The growing

proportion of cross-border RMB flow under

capital accounts, especially for investment

purpose, has more impact on the overall

RMB flow. In Q3 2015, cross-border RMB

trade settlement accounted for 64% of cross-

border RMB payments, down to 30% in 2019

and further dropped to 24% in Q1 2020.

Secondly, cross-border RMB flow under

capital account, especially for investment

purpose, have an increasing impact on the

RMB exchange rate. During 2013-14 and for

some time after 2015, the impact of cross-

border fund flows on RMB exchange rate

were mainly reflected by changes under

current account, e.g. companies changed

Special Topic


settlement methods, forming capital flows in

different directions, and taking advantages of

arbitrage. Since 2017, cross-border RMB

flows under current account have remained

stable, while capital account RMB flows

showed signs of rapid and large-scale shift

(from outflow to inflow). Stock connect and

bond connect are the direct cause of the

changing capital inflows. One possibility is

that risk aversion affects global investment in

RMB assets, with foreign institutional

investors pulling RMB out of the domestic

markets and investing into dollars and dollar

assets, posting further pressure on CNH.

III. RMB exchange rate outlookIn 2005, China reformed its RMB exchange

rate regime and implemented a “managed

floating exchange rate regime based on

market supply and demand with reference to

a basket of currencies”. Since then, China

has continuously improved the formation of

the central parity rate, reduced direct

intervention in the FX market, and guided the

rational trading behavior of market

participants. The RMB exchange rate

fluctuation has become increasingly market-

driven. The fundamental factor that

determines the RMB exchange rate is market

supply and demand. The stable growth of

China economy and national strength, as well

as the balance of international payments are

the pillars to keep the RMB exchange rate

stable at a reasonable and balanced level.

To be more specific, the RMB exchange rate

is influenced by both internal and external

factors, including the economic fundamentals

and monetary policy changes of China and

major European and American countries.

After the outbreak of Covid-19 around the

world, these economic fundamentals have

not changed. For example, negative

economy growth was recorded in China in

the first quarter of this year, as was the case

for Europe and the United States. But as

China's economy struggles to shake off the

negative impact of the epidemic, Europe and

the United States may slide back further in

the second quarter. On the other hand, in the

context of the implementation of unlimited QE

or even negative interest rates in Europe and

the United States, China and the US will

maintain a long-term wide interest rate

differential, which is a supporting factor for

the RMB exchange rate.

In addition, the RMB exchange rate, like

other major international currencies, has

been affected by various black swan, gray

rhino incidents, as well as the volatility

among various other currencies. The dollar,

for example, remains a safe haven, and

continue to be strong. RMB has depreciated

against the dollar, along with other

international and emerging market currencies.

Therefore, the dollar exchange rate index is a

very important reference for the trend of RMB

exchange rate.

Besides the 2-year China-U.S. trade war and

the Covid-19 epidemic this year, we now face

Special Topic


new market risks brought by the newly

proposed Hong Kong National Security Law.

These three uncertainties are of different

nature but will act simultaneously in the future,

increasing the possibility of RMB exchange

rate fluctuations.

Covid-19: The total confirmed Covid-19 cases

around the globe has so far reached more

than 6 million, with no signs of slowing down,

while the epicenter of the pandemic outbreak

has moved from Europe to the United States,

and then to Russia and Brazil. And Covid-19

is now spreading to India and other

underdeveloped countries. If the epidemic is

not effectively contained, not only will market

risk aversion remain, but economic activities

will also hardly return to normal. For some

countries and regions where the epidemic has

been brought under control, the resumption of

work, production, and school is progressing.

However, they will be isolated from Europe,

the United States and other emerging market

countries as a result of quarantines, so in fact

they will still be greatly affected. It is difficult to

predict the impact of the epidemic on the

economies and financial markets of various

countries, which has become a major variable

of the RMB exchange rate.

China-U.S. Trade War: China and the Unites

States signed the first phase of the trade

agreement on January 15 this year. Despite

the epidemic in China peaking at the end of

January, China still imported a large amount

of U.S. agricultural products to fulfill its

commitments under the agreement. Trump

has ambivalent attitude about the China-U.S.

trade agreement. On the one hand, he would

like to see more imports from China to help

his re-election campaign. On the other hand,

Trump government hope to distract from their

own mishandling of the pandemic by

undermining China’s efforts to contain the

epidemic. In addition, China and the United

States will enter into the second stage of

negotiations according to the consensus of the

two sides. It is possible that the two sides will

start negotiations later this year, but markets

are worried about the deep divisions that need

to be settled in the second phase. Therefore,

despite China's increased import

commitments, China-U.S. trade frictions have

not eased, becoming another variable in the

RMB exchange rate.

On the whole, the RMB exchange rate is

having a year of turbulence in 2020. In

particular, the pandemic, the trade war

between China and the United States, and the

proposed Hong Kong Security Law altogether

make it more difficult to predict the trend of the

RMB exchange rate. In my opinion, it will be

difficult for the RMB to stay within the range of

7 to 7.1 in the coming months, and the

fluctuation range will be extended to 7 to 7.2. If

the relationship between China and the United

States is not handled properly, further

weakening of the RMB (especially CNH)

cannot be ruled out.

Chart Book


Market Indicators

Hong Kong RMB Deposits (RMB bn) Hong Kong RMB Cross-border Trade Settlement (RMB bn)

USD-CNH and USD-CNY Exchange Rates

Source: HKMA Source: HKMA

Source: Bloomberg

Chart Book


CNH HIBOR Fixing (%)

Hong Kong Offshore RMB Bond Issuance (RMB bn)CNH & CNY China Sovereign Curve(%, 31 May 2020)

Source: Bloomberg

Source: Bloomberg Source: BOCHK Global Market estimate

End of Aprr:

Chart Book


RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

December 2019 April 202042.22%USD#1

EUR 31.69%#2

GBP 6.96%#3

JPY#4

1.79%

EUR 31.46%#2GBP 6.57%#3

3.79%#4#51.98%#5

CNY#6 1.94%

USD#1 43.37%

1.66%#6 CNY1.45%

#8 1.25%

3.46%

1.55%

#8 1.46%

JPY

#7#7

CAD

AUDHKD

CAD

AUDHKD

Disclaimer: This report is for reference and information purposes only. It does notreflect the views of Bank of China (Hong Kong) or constitute any investment advice.

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