RMB INTERNATIONALIZATION

Banking institutions operated in yuan increased from 900 to 10,000 in the four years ended 2014, according to SWIFT. HSBC is the market leader in the offshore yuan bond and RQFII businesses, followed by Standard Chartered. China Banks ICBC, CCB and Bocom are also competitors.

RMB INTERNATIONALIZATION

CHAPTER: YUAN GLOBALIZATION SHIFTS COMMODITIES TRADINGChina Touts Yuan on World Stage to Bolster Clout in CommoditiesAnalysts Yi Zhu (Metals) & Francis Chan (Banks)Jun 24, 2015

China’s recent steps to promote its currency for greater global acceptance include setting up five offshore yuan centers, launching the Shanghai-Hong Kong Stock Connect, and widening the yuan-trading band. The rise of the currency in global markets may promote trading of yuan-denominated commodities and increase China’s ability to influence prices. It may also help China’s small-scale metal producers gain access to offshore-funding channels.

A more global yuan could boost revenue for market leaders in the offshore yuan businesses, including HSBC and Standard Chartered. It may also increase pricing power for major Chinese metal producers including Chalco and Jiangxi Copper.

Yuan Rises to World’s Fifth-Largest Currency by Global PaymentsAnalyst Francis ChanJun 16, 2015

The yuan became the world’s fifth largest payments currency in April, with a 2.1% share. That’s up seven-fold from a 0.3% share and No. 17 ranking in December 2011. China’s steps to promote its currency since January 2014 include setting up five new offshore yuan centers, launching the Shanghai Hong Kong Stock Connect, and widening the yuan trading band. Further global acceptance of the yuan hinges on an IMF decision expected later this year on whether to include it in the Special Drawing Rights basket.

Major Chinese metal producers including Chalco, Jiangxi Copper, China Hongqiao would improve their market positions if China increases pricing power for commodities.

Zoomlion, Lonking and Sany Heavy are the largest mining and construction equipment manufacturers listed in Hong Kong. They may source from domestic steel producers such as Magang and Baosteel and global producers such as U.S. Steel and ArcelorMittal.

RMB INTERNATIONALIZATION

Yuan Emerging as Global Currency Would Lift China Pricing PowerAnalysts Yi Zhu (Metals) & Francis Chan (Banks)Jun 24, 2015

The yuan’s rise in global markets may promote commodities trading denominated in China’s currency, increasing its pricing power. While China is the largest importer and consumer of iron ore, copper ore, bauxite and other goods, it’s a price taker, unable to set the terms because most commodities are still denominated in dollars. International commodity trading uses mostly overseas exchanges for benchmarks, and transactions are settled in dollars.

Global Yuan May Add Supply, Cut Forex Risk for China Steel UsersAnalysts Steve Man (Autos) & Yi Zhu (Metals)Jun 24, 2015

China’s steel users could gain greater access to overseas markets and more bargaining power on prices after internationalization of the yuan. Local manufacturers could choose to buy steel overseas if the yuan was easily converted to other currencies for settling payments, or to demand settlement in yuan to reduce exchange-rate risks. Machinery and autos accounted for as much as 25% of China’s total steel demand last year.

Major Chinese metal producers including Chalco and Jiangxi Copper are trading through SHFE, which has a less dominant position than the LME.

RMB INTERNATIONALIZATION

China Still Depends on London for Base-Metal Trading, PricingAnalysts Yi Zhu (Metals) & Francis Chan (Banks)Jun 24, 2015

China, the world’s largest metal producer and consumer, relies on overseas exchanges for trading and pricing. Base-metal trading on the London Metal Exchange (LME), for example, accounts for more than 80% of global volume, overwhelming the Shanghai Futures Exchange (SHFE). LME’s approved warehouses, with the most locations, are the best indicators of global supply and demand for metals. Settlement prices on the LME are also used as benchmarks for most physical trading of metals.

China Needs to Fix Trading, Delivery Issues to Get Pricing PowerAnalysts Yi Zhu (Metals) & Francis Chan (Banks)Jun 24, 2015

Chinese metals producers face trading and delivery obstacles. The government restricts their access to trading on the LME, which has no warehouses in China. Overseas investors, meanwhile, can’t trade on the SHFE, which has no inventory storage outside of China. Beijing is working to globalize the yuan, deregulate interest rates, and set up free-trade zones to strengthen the financial-services industry. Even though Hong Kong Exchanges bought the LME in 2012, full integration has yet to materialize.

RMB INTERNATIONALIZATION

ICBC, China Construction, AgBank, Bank of China, China Merchants and Minsheng are among China’s largest lenders that disclose mining-loan balances. They had a total 1.1 trillion yuan ($180 billion) of mining loans, or an average 2.8% of gross lending, as of 2014.

China’s Miners Could Gain Funding Access with More Global YuanAnalysts Francis Chan (Banks) & Yi Zhu (Metals)Jun 22, 2015

The yuan’s emergence as a more global currency could open up offshore-funding channels for Chinese mining companies, especially smaller ones. The Chinese currency’s liquidity abroad may rise significantly if it is included later this year in the IMF’s basket of special drawing rights (SDR). Smaller Chinese miners, which are mostly cut off from domestic bank financing and aren’t big enough to raise dollar-denominated debts offshore, may tap offshore yuan funding to improve their financial positions.

Hong Kong Dominance of Yuan Transactions Boosts Revenue at HSBCAnalysts Francis Chan & Jonathan TyceJun 16, 2015

Hong Kong remains the dominant offshore-yuan center, comprising about 70% of payment traffic. Five new offshore centers have opened in China since January 2014. Singapore and the U.K. follow Hong Kong with a combined share of 12% in April. Hong Kong’s lead may boost revenue from yuan payments at the city’s largest lenders, including HSBC, BOC Hong Kong, Standard Chartered and DBS. HSBC set a target of raising yuan-business revenue to $2 billion to $2.5 billion by 2017, up from $1.7 billion last year.

China’s yuan could take a share of up to 10% of global-reserve currencies if it were to be included in the SDR basket. This would encourage its use worldwide, boosting revenue for market leaders in offshore yuan businesses, such as HSBC and Standard Chartered.

Sands China, Galaxy Entertainment, Swire Pacific, China Telecom, China Mobile, Hong Kong & China Gas and Cnooc are examples of new large-cap stocks in the consumer, communications and energy sectors that Chinese investors can now buy and sell through the stock link.

RMB INTERNATIONALIZATION

China’s Financial-System Restrictions Impede a Fully Global YuanAnalyst Tim CraigheadJun 11, 2015

The yuan isn’t fully convertible, and China hasn’t achieved an open capital account. These may remain hurdles for the currency to be included in the Special Drawing Rights (SDR) basket established by the IMF in its five-year review of global reserve currencies. China is starting to remove its capital and financial-system controls, as evidenced by last year’s launch of the Shanghai Hong Kong Stock Connect and liberalizing of lending rates. The SDR decision requires 70% approval from IMF member states.

China’s Exchange Connections Broaden Sector, Stock OpportunitiesAnalyst Tim CraigheadJun 11, 2015

The Shanghai-Hong Kong Stock Connect gives global investors new access to the world’s manufacturing hub. Hundreds of mid- to large-cap industrial, material and health-care stocks listed in Shanghai are included. A potential extension to selected Shenzhen-listed shares could add more technology, consumer and industrial exposure. Meanwhile, mainland investors can buy shares in more than 260 companies traded in Hong Kong in sectors such as telecom and consumer, which were previously inaccessible.

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