offshore rmb express · recorded a slight decline, but offshore rmb bond markets showed signs of...
TRANSCRIPT
Offshore RMB
Express Issue 49‧
March 2018
Contents
Part 3
Part 4
Part 1
Special Topics
Chart Book
Market Review
Part 2 Policy and Peers Updates 4
7
1
Editors:
Annie Cheung
Tel :+852 2826 6192
Email : [email protected]
Kera Kong
Tel:+852 2826 6205
Email: [email protected]
Sharon Tsang
Tel :+852 2826 6763
Email: [email protected]
15
Market Review
Offshore RMB Express 1
1. Offshore RMB exchange rate
continued to rise
In February 2018, the U.S. dollar index
rebounded slightly. Meanwhile, the RMB
appreciated against the U.S. dollar, pushing
up the CFETS RMB exchange rate index
slightly as the RMB appreciated against the
basket currencies. Currently, the RMB’s
exchange rate has remained stable at
around 6.34. Although the RMB’s exchange
rate became volatile during the Lunar New
Year, its performance remained relatively
solid. On February 28, CNH appreciated by
0.52% for the month and closed at 6.331,
while CNY appreciated by 0.67% to 6.331.
Overall, the RMB’s exchange rate is
expected to stabilize in the short term, and
the cross-border capital flows will maintain
basically balanced. As for HIBOR fixing,
CNH HIBOR fixing rates were relatively
stable in February. On February 28, the O/N,
1-week and 3-month CNH HIBOR rates were
2.9645%, 3.4623% and 4.652%, respectively.
2. Major RMB business indicators
declined slightly
RMB deposits in Hong Kong decreased
by 2.3% MoM to RMB 546.4 billion in
January 2018. The total remittance of RMB
for cross-border trade settlement amounted
to RMB 373.4 billion in January, down by
RMB 55.3 billion from the previous month. In
Taiwan’s offshore market, RMB deposits
increased by 17% to RMB 377.6 billion in
January 2018 from end-2017. RMB deposits
in Singapore increased by 20.1% YoY to
RMB 152 billion as of end-2017.
In February, the exchange rates of both onshore and offshore RMB against the US dollar
(CNY and CNH) continued to perform strongly, major offshore RMB business indicators
recorded a slight decline, but offshore RMB bond markets showed signs of recovery. The rising
international usage of RMB and further opening of the domestic capital markets have provided
solid support for the long-term and steady development of RMB internationalization.
Offshore RMB Market Performed
Steadily
Market Review
Offshore RMB Express 2
SWIFT data in January 2018 showed that the
RMB maintained its position as the fifth most
used currency for global payments with a
market share of 1.66%. Besides, Hong Kong
continued to be the largest offshore RMB
center, accounting for 75% of the total
offshore RMB turnover. In February 2018,
RTGS turnover decreased by 19.9% MoM to
RMB 15.36 trillion.
3. Dim Sum bond market recovered
In February, the Macao SAR issued its
first offshore RMB bond (named "Lotus
Bond" at a total of RMB 4 billion). This "Lotus
Bond" was also the largest bond issuance
among the offshore RMB markets since the
"August 11" reform, reflecting the
strengthened investor confidence around the
globe and the surging demand for offshore
RMB asset allocation. As of February 2018,
the issuance of Dim Sum bond was RMB 6
billion, which increased substantially from
RMB 630 million in the same period of last
year.
4. International use of RMB continued
to rise
Recently, the National Bank of Pakistan
issued a statement, which approved traders
to use RMB as the settlement currency for
their bilateral trade with China. The French
central bank, the Bundesbank and the central
bank of Spain revealed their intention to
invest in RMB. The Belgian central bank and
the Slovakian central bank have already
Market Review
Offshore RMB Express 3
added RMB assets. The central banks of
China and Thailand have renewed a
currency swap agreement of RMB 70 billion
(equivalent to THB 370 billion). According to
the latest data released by the People’s Bank
of China, as of the end of January 2018, the
bonds held by overseas institutions in
China's interbank bond market increased by
145% YoY and exceeded RMB 1.25 trillion,
setting a new record and marking the 11th
consecutive monthly gain.
5. Domestic capital markets opened
further
According to statistics from the State
Administration of Foreign Exchange (SAFE),
the approved quota for RQFII totaled RMB
612.4 billion as of February 27, up RMB 2
billion compared with a month ago, with a
total of 196 qualified foreign institutional
investors having been approved. At the same
time, the approved quota for QFII totaled
RMB 99.2 billion as of February 27, with a
total of 286 qualified foreign institutional
investors having been approved. In addition,
the approved quota for QDII totaled RMB 90
billion as of February 27, with a total of 132
qualified foreign institutional investors having
been approved. Both the approved quota and
the number of institutional investors were the
same as the previous month. No new quotas
were approved in the past 27 months.
Policy and Peers Updates
Offshore RMB Express 4
BOC Macau branch issued RMB 4 billion
bonds abroad
On February 26, Bank of China (BOC) Macau branch completed pricing of RMB 4
billion bonds issued abroad, including RMB 1.5 billion 1-year bonds and RMB 2.5 billion
3-year bonds. The funding costs were lower than those onshore bonds for the same
tenors. The issuance amount was the largest in the offshore markets since the “August
11” reform. There were active responses from international investors, implying that they
had more confidence in RMB internationalization and increasing demand for offshore
RMB asset allocation.
Sharjah of UAE issued RMB 2 billion sovereign panda bonds
On February 1, the Government of Sharjah, one of the members of the United Arab
Emirates (UAE), issued RMB 2 billion panda bonds with 3-year tenor in China’s interbank
market. Bank of China was the bookkeeper and one of the joint underwriters for the
issuance, joining with Industrial and Commercial Bank of China, HSBC (China) and
Standard Chartered Bank (China). Until now, the British Columbia Provincial Government
of Canada, Hungary, Poland and South Korea have issued sovereign RMB bonds in
China’s interbank bond market.
China will launch crude oil futures in late March
China Securities Regulatory Commission announced that preparations for the launch
of crude oil futures have almost done, and the futures contract will be listed on the
Shanghai International Energy Exchange on March 26. According to the Shanghai
International Energy Exchange, the RMB-denominated futures contract will be available
to foreign investors, exchanges and petroleum companies, facilitating the influences of
Chinese enterprises and exchanges on international oil prices.
Policy and Peers Updates
Offshore RMB Express 5
JPMorgan Chase became the second RMB Clearing Bank in the US
On February 13, the People’s Bank of China authorized JPMorgan Chase & Co. as
the RMB Clearing Bank in the US, making it the second RMB Clearing Bank in the US
following BOC New York branch. Some market views stated that competition among two
Clearing Banks would not be fierce, as the US is the world’s largest economy and
important financial center. On the contrary, they could complement each other’s strengths
and promote cross-border RMB settlement between China and the US.
Special Topics
Offshore RMB Express
At the beginning of 2018, spillover effects of monetary policies from major economies
triggered simultaneous fluctuations in global financial markets. Persistent systemic risks
revealed the intrinsic drawbacks under the existing global monetary system led by the US
dollar. Diversification of global monetary system should proceed at a faster pace.
Meanwhile, RMB internationalization has entered a new stage of development. In January
2018, the People’s Bank of China (PBOC) improved and optimized policies for cross-
border RMB business. The policies sent out positive signals, which would support cross-
border RMB settlement by enterprises, facilitate foreign institutional investors to use the
RMB for direct investment, and promote RMB business for individuals. Control measures
on cross-border fund flows, especially some temporary administrative measures, are
likely to ease gradually given receding depreciation pressure on the RMB. This will
provide favorable conditions for the resumption of RMB internationalization.
Dr. Zhihuan E,
Chief Economist, Bank of China (Hong Kong)
Risk Control is the Priority for the
Resumption of High-Quality RMB
Internationalization
7
Financial risk control determines the
potential of RMB internationalization
With deepening integration with the global
financial system, China’s financial markets will
engage complex global market environment
directly and be subject to a variety of external
shocks. As a result, risk control plays a crucial
role in financial market opening.
While external risks escalate, financial
risks in China’s economic development are
becoming more prominent. Total debt to GDP
ratio climbed to 284% in 2017 from 277% in
2016. It requires tremendous efforts to reduce
leverage ratio, while risks of shadow banking,
property finance and internet finance continue
to accumulate. Against the backdrop, there is
urgent need to prevent and resolve financial
Special Topics
Offshore RMB Express 8
risks through controlling leverage ratio,
enhancing the adaptability of financial
structure, increasing the capability of
financial services to support the real
economy, strengthening the development of
mandatory constraint system and controlling
systemic risks. The PBOC improved macro-
prudential policies on cross-border fund flows
and conducted counter-cyclical adjustments
on capital flows. Moreover, the PBOC
continued to deepen reform of the RMB
fixing mechanism, based on market supply
and demand dynamics and a basket of
currencies, as well as adopting a managed
floating exchange rate regime. Consequently,
the RMB would be more determined by
market factors with flexibility and maintain its
stable status in the global monetary system.
Apparently, China’s capability of
controlling external and internal financial
risks determines the potential of RMB
internationalization. During the second half of
2017, market sentiment turned neutral with
the RMB approaching equilibrium, and the
central bank adjusted its policy timely by
relaxing a series of "temporary" and
"transitional" cross-border macro prudential
management measures, including removing
the risk reserve ratio of foreign exchange and
the requirement for foreign banks to set
aside reserves for offshore RMB deposits in
China. In 2018, the expectation of RMB
depreciation has reversed. The PBOC
adjusted the counter-cyclical coefficient
incorporated in central parity fixing model
accordingly. The RMB fixing mechanism
would be more liberalized, with more
weighting on market supply and demand
dynamics. Theoretically, this would be
favorable for promoting businesses related to
RMB internationalization.
If systemic shocks occur in global
financial markets, the stability of the RMB will
be under new pressure, and the pace of
RMB internationalization will be adjusted
accordingly.
Four takeaways on the roadmap of
RMB internationalization
First of all, RMB internationalization is a
long-term strategy. Theory innovation and
exploring the way of implementation are
necessary regarding major topics on
developing a modern economy. A theoretical
framework should be built underpinned by
macroeconomics and finance perspectives
with a comprehensive and open approach.
The basic roadmap of RMB
internationalization is to persist in
liberalization reform in foreign exchange
market, maintain the RMB’s stable status in
Special Topics
Offshore RMB Express 9
the global monetary system, resolve the
systematic drawbacks under existing global
monetary system led by the US dollar,
provide an alternative option and new public
goods from emerging markets, and offer a
Chinese solution in order to promote a more
robust and fair global monetary system.
Next, create room for RMB
internationalization, following the trend of
China’s financial market opening, driven by
policy while guided by markets. Technically,
increasing the RMB’s proportion in global
exchange reserves and foreign exchange
market cannot be realized in a short period of
time. Instead, it is necessary to explore from
multiple perspectives, such as cross-border
trade and investment, encouraging third-
party usage, etc. Consequently, the
collaborating development of merchandise
trade, investments and financial transactions
will help formulate an effective roadmap for
RMB internationalization.
In addition, demand for global asset
management by domestic entities is likely to
rise for an extended period of time. In China,
the holding of foreign financial assets by
private sector amounts to 27% of GDP. The
ratio is significantly lower than 129% for the
US and 147% for Japan. Therefore, the scale
and structure of capital flows will continue to
adjust and optimize, and the factors affecting
RMB internationalization will be more diverse.
A bottom line mindset with core value of
controlling financial risks is needed. In-depth
analysis on relevant policies and potential
market impacts should be taken when
making major policies.
Finally, RMB internationalization is a
major topic of global monetary system. The
objective of RMB internationalization implies
that China will take more responsibility on
maintaining the stability of global financial
system and play a proactive role in global
financial governance. Accordingly, policy
collaboration between domestic and foreign
markets, taking into account the interests of
domestic and foreign entities, should be
emphasized in order to promote RMB
internationalization progressively.
12
Special Topics
Offshore RMB Express
The Scale and Structure of
China’s U.S. Treasury Holding
from TIC Data
Michael DAI, Senior Economist
In recent months, with trade frictions between China and the U.S. rising, the yield
on the 10-year U.S. Treasury also continued to rise. The data from U.S. Department of
the Treasury showed that in November 2017, China's U.S. Treasury holdings were
down by USD 12.6 billion from October, raising concerns about continued decline in
China’s Treasury holdings.
Treasury International Capital System
(TIC) of the U.S. Department of the Treasury
is the most official statistics provider for
foreign investor holdings of USD securities
assets, including Treasury. The statistics are
specific to asset categories such as
government bonds, agency bonds, corporate
bonds and equities that provide global
comparable data. These statistics can
provide a useful reference but should not be
considered comprehensive for USD
securities assets held by foreign investors,
as their data come from filings and surveys
by domestic custodians (including banks,
brokers, investors, issuers, etc.), and there
are thresholds for reporting amount (for
example, the amount of cross-border
transactions has to reach more than USD 50
million). The identity of foreign investors may
not be accurately reflected in the TIC
statistics if they trade and hold USD assets in
offshore markets. In addition, the foreign
investor statistics are not subdivided into
official and private investors. Nevertheless,
the statistics are still the most important
series for market tracking and analysis.
11
Special Topics
Offshore RMB Express
According to its statistics, China’s U.S.
Treasury holdings actually decreased by
USD 12.6 billion in November 2017 from the
previous month, but one should not read too
much into the one-month change. Firstly, the
statistics show that China added USD 8.3
billion of U.S. Treasury in December again.
In 2017, there were three months of decline
and nine months of increase in China's U.S.
Treasury holdings. The largest monthly
increase is USD 44.2 billion in June. For
2017 as a whole, the total amount of China’s
U.S. Treasury holdings increased by USD
126.5 billion from the end of 2016. Secondly,
according to TIC statistics, the balance of
U.S. national debt held by foreign investors is
calculated based on the market value of the
Treasury bonds and notes (short-term
government bills are denominated in face
value but do not change the conclusion due
to their low shares). In 2017, the U.S. 10-
year Treasury yield dropped slightly from
2.44% to 2.41%, so the long-term Treasury
bonds should slightly appreciate, but the
magnitude is small and not big enough to
change the conclusion that China is
increasing its holdings of U.S. Treasury.
As mentioned above, TIC statistics do
not subdivide foreign investors into official
and private investors. However, based on the
foreign exchange management system in
China, the vast majority of the U.S. Treasury
owned by China should be the holdings of
official foreign exchange reserves. Firstly,
China’s international investment position
released by State Administration of Foreign
Exchange in the third quarter of 2017 shows
that, of the foreign assets held by China, the
size of reserve assets totalled USD 3204.4
billion (the vast majority of which was foreign
exchange reserves), while privately held
foreign securities assets amounted to only
USD 453.8 billion, of which only USD 171.9
billion were in bonds. As a result, China's
increasing instead of declining holdings of
U.S. Treasury become more prominent, as
China's official foreign exchange reserves
rose by USD 129.4 billion in 2017, almost
equal to China's increased holdings of U.S.
Treasuries (USD 126.5 billion). It shows that
not only official but private investors are also
increasing their holdings of U.S. Treasury.
12
Special Topics
Offshore RMB Express
Secondly, the bottoming of China's
foreign exchange reserves in 2017 was due
to the factors of balanced cross-border
capital flows, depreciation of the USD and
the rise in the valuation of non-USD assets in
foreign exchange reserves. The People's
Bank of China’s funds outstanding for foreign
exchange dropped in the first eight months of
2018, rose slightly in September to
November and fell again in December. The
central bank’s funds outstanding for foreign
exchange fell by a total of RMB 463.7 billion
for the whole year. The decline was
significantly narrower than the RMB 4,644.1
billion decline in 2016. In addition, as G10
currencies appreciated against the USD in
2017, with the Euro, British Pound and the
Japanese Yen up by 14.2%, 9.5% and 3.8%
respectively against the USD, non-USD
assets converted into USD in China’s foreign
exchange reserve would appreciate. While
this was an accounting gain, the increase of
US Treasury holdings has to be paid for by
real money, corroborating China’s increasing
instead of reducing US Treasury holdings.
The situation is similar with longer
historical data. China’s official foreign
exchange reserves peaked at USD 3,990
billion in June 2014 and dropped to USD
2,998.2 billion by January 2017, for a drop of
USD 991.8 billion or by 24.9%. During the
same period, TIC showed that U.S. Treasury
held by China was reduced from USD
1,268.4 billion to USD 1,051.1 billion, for a
decrease of USD 217.3 billion or 17.1%.
Judging from the asymmetrical decline of
China’s official foreign exchange reserves
and U.S. Treasury held by China, China was
very cautious with reducing holdings of U.S.
Treasury to cope with outflows and the
decline in foreign exchange reserves. The
ratio of China’s holding of U.S. Treasury to
China's foreign exchange reserves rose from
31.8% to 35.1%, as any reductions of
holdings were conservative and passive. In
addition, the reduction of China's foreign
exchange reserves during this period was
due to the outflow of capital as well as the
strong U.S. dollar causing the impairment of
the non-USD portfolio. However, the impact
of the latter is relatively small and will not
change China's positive attitude of holding
U.S. Treasury.
13
Special Topics
Offshore RMB Express 14
There are long-term and short-term U.S.
Treasury securities. More than 99% of
China’s holdings are long-term Treasury
bonds and notes. In horizontal comparison,
China and Japan are the largest holders of
official foreign exchange reserves and U.S.
Treasury in the world. Interestingly, however,
TIC data show that Japan’s holding of U.S.
Treasury outnumbered China’s from October
2016 to May 2017, by more than USD 50
billion in some months. Considering that
Japan's official foreign exchange reserves
amount to only 40% of that of China, this
implies that a certain part of Japan's holdings
of U.S. Treasury are held by the private
sector rather than the Bank of Japan, which
is partially the result of Yen convertibility and
Japan as the world's largest creditor. In
addition, short-term U.S. Treasury bills held
by Japan are over 5.0%, obviously different
from China’s less than 1.0%.
In addition to Treasury, the broad
definition of long-term USD securities assets
includes agency bonds, corporate bonds and
equities. TIC data show that the size of these
four types of assets held by China in
November 2017 were USD 1173.1 billion,
USD 174.3 billion, USD 16.4 billion and USD
197.6 billion respectively, with an aggregate
amount of USD 1561.4 billion, equivalent to
50% of USD 3119.3 billion of foreign
exchange reserves in the same period. As
for Japan, it held USD 1,021 billion of long-
term U.S. Treasury, USD 247.6 billion of
agency bonds, USD 206.3 billion of
corporate bonds and USD 526.5 billion of
equities over the same period, with an
aggregate amount of USD 2001.5 billion,
equivalent to 167% of USD 1198.9 billion of
Japan’s foreign exchange reserves in the
same period, reflecting the considerable size
of its private holdings.
Due to the involvement of private
investors, in long-term USD securities assets,
Japan holds more than ten times of
corporate bonds than China and more than
twice of equities than China. The proportion
of Treasury is therefore less than that of
China, reflecting official and private investors’
different mandates on security, liquidity and
risk and return. In 2017, long-term U.S.
securities assets held by China and Japan
both increased significantly, but China's
growth mainly came from U.S. Treasury,
while Japan’s growth all came from other
three types of assets except treasury.
Therefore, for international investors of U.S.
Treasury, it is still reasonable for the market
to scrutinize China.
Chart Book
Offshore RMB Express
Market Indicators
15
Hong Kong RMB Deposits (in RMB bn) RMB Cross-border Trade Settlement (RMB bn)
USD-CNH and USD-CNY Exchange Rates
Source: HKMA Source: HKMA
Source: Bloomberg
Chart Book
Offshore RMB Express 16
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
CNH & CNY China Sovereign Curve (%, 28 Feb 2018)
FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
End of Feb:
End of Feb:
Chart Book
Offshore RMB Express
January 2016 January 2018
42.96% USD #1
EUR 29.43% #2
GBP 8.66% #3
JPY 3.07% #4
1.66% CNY
EUR 32.75% #2
GBP 7.22% #3
JPY 2.80% #4
#5 2.45% #5 CNY
CAD #6 1.74%
USD #1 38.53%
1.51% #6
CHF
CAD
#7 1.42%
AUD #8 1.38%
17
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
Disclaimer: This report is for reference and information purposes only. It does not
reflect the views of Bank of China (Hong Kong) or constitute any investment advice.
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