Deutsche Bank - A brief guide to China's global currency

36 Pages·2015·2.15 MB·English

Deutsche Bannkk
Harnessing the
RMB opportunity
A brief guide to China’s global currency
A brief guide to China’s global currency 1
Contents
1. The road ahead for RMB internationalisation 3
2. Why adopt the RMB? 10
3. Foreign exchange and rates 12
4. Transaction banking 15
5. The ofshore RMB fxed income market 23
6. FAQ for corporations 28
7. Keeping informed 32
A brief guide to China’s global currency 1
2 A brief guide to China’s global currency
The road ahead for RMB
internationalisation
Rapid growth in the global use of the renminbi will continue
for years to come, and is testament to China’s stature as a
prominent economy and trading power.
Renminbi (RMB) internationalisation is occurring new clearing banks were appointed in fnancial
within the context of China’s managed transition centres across Asia, Europe, and in Canada. In
towards a more market-driven economy, early 2015, the Chinese government and PBoC
which necessitates greater mobility and have stated that China is working towards full
market-based pricing of capital. Since 2009, RMB convertibility under the capital account,
the Chinese authorities have accelerated the suggesting that the process of reform will
process of fnancial reform through currency continue to see positive momentum.
internationalisation, capital account opening
However, RMB internationalisation has also
and the gradual liberalisation of domestic
entered a phase when steady FX appreciation
interest rates. Although there continues to be
can no longer be taken for granted. Indeed,
debate about the ideal sequence and timing
the value of the currency against the US dollar
of reforms, Chinese policymakers have taken
weakened in 2014, reversing a multi-year trend
signifcant steps to allow more fexibility in all
of appreciation. As the RMB trades with greater
three areas.
two-way movement, its ofshore use is becoming
The process of interest rate liberalisation has led less infuenced by currency speculation and
to the removal of nearly all restrictions on lending more so by genuine business demand.
rates, and increasing latitude for banks to set
Redenomination of cross-border trade in RMB
deposit rates in relation to the People’s Bank of
may bring efciency improvements, reduced
China (PBoC) benchmark. Signifcant steps have
transaction costs and discounts in some cases.
also been taken to allow more fexibility in the
The recent relaxation of regulatory restrictions
exchange rate. In 2014, the daily trading range
makes it easier for multinational companies to
against the US dollar (USD) was doubled from
manage cash across borders and move funds
1% to 2% and banks onshore were permitted to
from their China operations across borders
set their own RMB/USD FX rates for retail clients.
relatively freely. Currency risk can be neutralised
The RMB is now fully convertible on the current
by raising capital in the ofshore RMB bond
account, but also across an increasing number
market to fund onshore subsidiaries. Investors
of items on the capital account. Deutsche
meanwhile gain unrestricted access to RMB
Bank’s research department has projected that
assets through international FX and debt
China will complete the process of interest rate
markets, and can now invest in onshore equities
liberalisation by the end of 2016 and make the
through the pilot Stock Connect programme in
RMB fully convertible by 2020.
Hong Kong.
The internationalisation of the RMB has
outpaced other areas of fnancial reform,
entering an accelerated phase in 2014, as
A brief guide to China’s global currency 3
Key Milestones in RMB internationalisation
2004 - 2006 2007 2008 2009 2010 2011 2012
— Banks allowed to take RMB — Corporates allowed to issue RMB — Retail investors allowed to transfer RMB deposits
deposits and to conduct bonds in Hong Kong to other bank accounts and corporates allowed to
conversion for individuals establish RMB accounts in Hong Kong
— Attractive yield (3.0-3.5%) for both
capped at RMB 20,000 per
retail customers and deposit-taking — Creation of CNH FX and rates inter-bank markets
day in Hong Kong
banks
— RMB supply rose due to spot CNY-CNH arbitrage
— Banks started to earn
— Sharp increase in RMB deposit from exporters, and sharp increase in Hong Kong-
86.5bps deposit rate from
base in early 2008, driven by the China cross-border settlement amounts
Shenzhen branch of PBoC,
anticipation of CNY appreciation
— Increased issuances of RMB bonds and CDs
after clearing charge from
(12% appreciation priced into
the clearing bank Bank of — RQFII quota increased from RMB 20bn to
12-month NDF)
China (Hong Kong) RMB 270bn
— Retail customers received — MNCs allowed to make RMB cross border loans
RMB deposit rates in the
40-70bps range
— CNH refers to the Chinese RMB
circulating in ofshore markets, including
but not limited to Hong Kong
Current account items: development of RMB cross-border trade settlement
— In July 2010, the PBoC made signifcant schemes from 2009 to 2012
relaxations to the rules for the RMB
business in Hong Kong, allowing RMB July 2009 – Until Aug 2011 – Mar 2012 –
to circulate more or less freely in Hong RMB Cross-Border Expanded Scheme Full relaxation
Kong and permitting CNH fnancial Trade Settlement The RMB cross-border Following the
products Scheme launched settlement programme announcement of “the
— Current account items include The RMB cross-border was expanded a few Notice of improving the
merchandise trades, service trades and trade settlement times and by Aug 2011, administration of MDEs
other current account items scheme was launched. it was expanded in RMB cross border
Initially under the nationwide and to trade settlement”, the
pilot programme, a all countries/regions RMB cross border trade
total of 365 Mainland abroad, RMB trade settlement scheme
Designated Enterprises settlement applied became applicable for all
(MDEs) were permitted to merchandise and transactions under the
to settle merchandise services imports and current account by all
exports in RMB. services exports; for eligible enterprises, both
merchandise exports, exporters and importers.
only MDEs were eligible
and the list of MDEs had
yet to be expanded.
4 A brief guide to China’s global currency
2013 2014 2015
Expanding ofshore RMB business: RMB Cross-border fows Expanding ofshore RMB
business:
— F eb 2013: RMB business in Taiwan was — F eb 2014: PBoC issued Notice to support the
ofcially launched with RMB deposits expansion of RMB cross-border usage in SHFTZ — J an 2015: PBoC signed
MOU with Swiss National
— A pril 2013: PBoC signed RMB Clearing — M ar 2014: PBoC liberalised FX deposit rate in
Bank on RMB clearing
Agreement with ICBC Singapore; PBoC SHFTZ
arrangement in Switzerland
signed an MOU with MAS on cooperation
— M ay 2014: MNC cross-border FX cash pooling
on RMB business in Singapore Relaxing capital account
— M ay 2014: PBoC announced detailed
access:
Enhancing ofshore RMB liquidity facility:
implementation rules on SHFTZ account
— J an 2015: Switzerland
— J uly 2013: The operations of the RMB management and prudential management rules
received RMB 50bn
liquidity facility was enhanced to provide
— J un 2014: Shanghai liberalised FX deposit rates RQFII quota
overnight and one-day funds by the Hong
— N ov 2014: RMB two-way cross-border cash
Kong Monetary Authority (HKMA)
sweeping programme was expanded nationwide
Relaxing capital account access:
(from SHFTZ)
— M ar 2013: Expanded RQFII programme to
Relaxing capital account access
fnancial institutions
— E xpansion of RQFII programme
— M ay 2013: PBoC allowed RQFII investors to
— M ar 2014: Paris received RMB 80bn RQFII quota
access China’s interbank bond market
— J ul 2014: South Korea received RMB 80bn RQFII
— J uly 2013: Simplifed RMB cross-border
quota, Frankfurt received RMB 80bn RQFII quota
settlement; onshore fnancial institutions
allowed to make RMB cross-border loans; — N ov 2014: Doha received RMB 30bn RQFII
borrowing limit by onshore MCBs from quota, Canada received RMB 50bn RQFII quota,
ofshore participating banks increased Australia received RMB 50bn RQFII quota
from 1% to 3%; tenor for such borrowing Launch of HK-Shanghai Stock Connect programme
extended from 3M to 1Y; free RMB fows
— A pr 2014: HK-Shanghai Stock Connect
between onshore MCB accounts and
programme announced
ofshore RMB accounts allowed
— N ov 2014: HK-Shanghai Stock Connect
— O ct 2013: Use of RMB allowed to settle
programme launched
foreign investment in domestic fnancial
Launch of RMB QDII program
institutions
— N ov 2014: RMB QDII programme launched;
— M ar 2013: Expand RQFII programme
PBoC does not impose QDII quota
to fnancial institutions in Hong Kong;
removal of asset allocation requirements Expanding ofshore RMB business
— J uly 2013: QFII quota increased to — M ar 2014: PBoC signed MOU with Deutsche
USD 150bn from USD 80bn; RQFII Bundesbank on RMB clearing arrangement
programme is launched in Singapore
— A pr 2014: PBoC signed MOU with Bank of
and London
England on RMB clearing arrangement
— O ct 2013: London is granted RMB 80bn
— J un 2014: PBoC appointed Bank of China
RQFII quota; Singapore is granted
Frankfurt Branch as the RMB clearing bank in
RMB 50bn RQFII quota
Frankfurt and China Construction Bank London
Developing Shanghai FTZ: branch as the RMB clearing bank in London;
PBoC signed MOU with Banque de France on
— S ept 2013: Shanghai Free Trade Zone
RMB clearing arrangement and Banque centrale
(SHFTZ) established to test economic
du Luxembourg on RMB clearing arrangement
and fnancial reforms within a pilot area
— J ul 2014: PBoC appointed Bank of
Communication Seoul as the RMB clearing bank
in Seoul and signed MOU with Bank of Korea on
RMB clearing arrangement
— S ep 2014: PBoC appointed ICBC Luxembourg
as the RMB Clearing Bank in Luxembourg,
appointed Bank of China Paris as the RMB
Clearing Bank in Paris
— N ov 2014: PBoC appointed Bank of China Doha
as the RMB Clearing Bank in Qatar, and appointed
ICBC Canada as the RMB Clearing Bank in
Toronto; signed MOU with Bank Negara Malaysia
on RMB clearing arrangement; and appointed
Bank of China Sydney as the RMB Clearing Bank
in Sydney
— D ec 2014: PBoC signed MOU with Bank
of Thailand on RMB Clearing arrangement

A brief guide to China’s global currency 5
Figure 1. Global RMB Deposit Balances
Evolution of the ofshore market
RMB bn
While previously ofcial RMB clearing banks 2500

existed only in Greater China and Singapore,

2000
from 2014 onwards there has been a rapid

expansion of ofshore clearing centres with ten
1500
new jurisdictions announced: London, Frankfurt,
Paris, Luxembourg, Seoul, Qatar, Toronto, 1000
Sydney, Kuala Lumpur, Bangkok and Zurich.
500
China’s approach has been to establish a
0
global network of ofshore RMB clearing
Q1 2015 2013 2012 2011
banks, currency swap agreements, RMB
Hong Kong Taiwan Singapore Macao London
Qualifed Foreign Institutional Investor (RQFII) New York Korea Luxembourg Paris
Source: Deutsche Bank, various central bank websites
quota, along with an associated systems and
regulatory framework.
The RMB has also begun direct currency
RMB cross-border trade settlement
trading against the euro, the British pound, the
Singapore dollar, the Korean won and the New Since the frst pilot scheme to allow cross-
Zealand dollar. The RMB already had direct border RMB trade settlement was established
currency trade with the US dollar, the Japanese in 2009 and expanded to include all Chinese
yen, the Australian dollar, Russia’s rouble and provinces and global counterparties in 2011,
the Malaysian ringgit. the˛redenomination of cross-border trade to
RMB has grown swiftly. The currency’s share
Global RMB deposits of trade settlement volumes has received a
further boost from the relaxation in management
Total deposits in the ofshore RMB market
and regulatory oversight of cross-border fows.
stood at an estimated RMB 2.2tn by the end of
In 2014, RMB cross-border settlement fows
January 2015, up 35% from RMB 1.63tn a year
amounted to RMB 6.56tn, up 42% from 2014.
earlier. About 57% of global deposits were held
At˛the end of 2014, 21.6% of China’s cross-
in Hong Kong (where the RMB retail conversion
border trade was denominated in RMB,
limit was removed in November 2014) compared
compared to only 2.5% in 2010.
to 67.5% in 2013 and 82% in 2012.
Deutsche Bank expects 25% of China’s global
In 2014, RMB deposit growth was particularly
trade volume to be denominated in RMB by the
strong in Taiwan (up 40%), Macau (42%),
end of 2015. By comparison, 30-40% of Japan’s
Singapore (32%), and various European centres.
external trade is settled in yen, while 50-60% of
In the span of just one year, South Korea has
the Eurozone’s external trade is settled in euro.
emerged as a major jurisdiction in the ofshore
RMB landscape, having quickly amassed the Since October 2013, the renminbi has been the
fourth-largest RMB pool in the ofshore market, second-most used currency in trade fnance,
with the RMB now accounting for more than a based on SWIFT data.
quarter of foreign currency deposits, from just
0.4% at the end of 2012.
Figure 2. RMB is the second-most used currency
A slowdown in the pace of ofshore RMB
globally in trade fnance (letters of credit and collection,
deposit growth observed from late-2014 and inbound and outbound trafc) based on value
early 2015 can be attributed to broad US
%

dollar strength and increasing volatility in
90
the CNH spot and forward markets. Despite 80
diminished expectations for RMB appreciation 70
vs. USD, Deutsche Bank expects the ofshore 60
deposit base to continue expanding due to RMB 50
40
investment and diversifcation demand from
30
corporates, institutions, and foreign central banks.
20
10
0
USD RMB EUR JPY
Jan 15 Jan 13
Source: Deutsche Bank, SWIFT
6 A brief guide to China’s global currency
Figure 3. Top fve users of RMB in trade fnance Milestones in capital account liberalisation
Macau 0.9%
Chinese policymakers have continued relaxing
Taiwan 0.9%
Others 4.1% capital account controls to allow more direct
Singapore 9.7%
investment fows into and out of China. More
China 63.5%
Hong Kong 21.0% than 30% of China’s (inward) foreign direct
investment by non-fnancial institutions is
now made in RMB, while Deutsche Bank
estimates that about 4.3% of China’s total
corporate outbound direct investment is RMB-
denominated. Total inbound and outbound
RMB direct investment settlement fows in 2014
Source: Deutsche Bank, SWIFT amounted to RMB 1.05tn, up 96% from 2013.
The most signifcant milestone of recent years
in the liberalisation of portfolio investment fows
SWIFT data also points to continued expansion was the launch of the Shanghai-Hong Kong
in the use of RMB as a global payments Stock Connect in November 2014. This mutual
currency. In 2014, RMB payments grew in market access scheme allows participants in the
value by 102% compared to an overall yearly two cities to invest in each other’s stock markets
growth for all currencies of 4.4%.The expansion without the need for institutional quota, and
in ofshore RMB clearing centres will be an is all the more signifcant considering that this
important driver to fuel future growth in RMB mechanism will expand to cover the Shenzhen
payments. Stock Exchange and additional asset classes
over time.
The ofshore RMB fxed income market
Unsurprisingly, turnover was modest in
Issuance of so-called “dim sum” products the initial months, as the scheme launched
reached a record high in 2014 with RMB 560bn before many global funds were able to satisfy
in gross supply, a 46% increase from 2013. The operational and regulatory considerations.
total outstanding RMB fxed income market Deutsche Bank expects that the Stock Connect
increased in size by 31% year-over-year to reach scheme will attract more volumes over time as
RMB 760bn at end-2014 (during the year, the more institutions become able to participate.
ofshore RMB bond market grew 40% to RMB In early-April, a surge in purchases of Hong
500bn, while the certifcates of deposit (CDs) Kong-listed equities by Chinese investors was
market grew 7%). recorded after the Chinese securities regulator
authorised domestic mutual funds to use
Much of this growth was driven by a large
the scheme without the need for Qualifed
wave of refnancing, as well as low swap rates
Domestic Institutional Investor (QDII) status.
between the RMB and the US dollar, which
The possible inclusion of Chinese A shares in
increased the appeal of dim sum debt on an
global benchmarks would serve as a catalyst
asset-swapped basis.
to increase the global appetite for domestic
Regionally, in Taiwan, RMB Formosa bond Chinese equities, bringing higher infows.
issuance rose 96%, bringing the total RMB
Progress in capital account opening is also
Formosa bond market to RMB 31.4bn. In
evident from the expansion of the RQFII
terms of issuers, supranationals and a number
programme to new ofshore centres in Europe,
of foreign states became more active in the
North America, the Middle East, and Australia –
CNH bond market in 2014, with the British
and the expansion of the total quota from RMB
government issuing the frst non-Chinese central
400bn in 2013 to RMB 1tn as of March 2015;
government bond.
the expansion of interbank bond market access
Despite its rapid development, the ofshore to foreign investors; the removal of the PBoC’s
RMB bond market must grow and diversify quota control over the RMB QDII; the nationwide
signifcantly more before it can rival China’s expansion of an RMB cross-border cash pooling
onshore bond market in scale. Issuance in the programme; and the liberalisation of RMB cross-
ofshore RMB fxed income market has been border fnancing in the Shanghai Free Trade
decelerating in early-2015, amid convergence Zone and three other newly established Free
in China’s onshore and ofshore rates and a Trade Zones.
strengthening dollar.
A brief guide to China’s global currency 7
These developments have broadened their onshore RMB cash with their regional
cross-border investment channels and and/or global cash pools. A pilot in early 2014
enabled companies to access ofshore permitting two-way cross-border cash sweeping
fnancing, improve treasury efciency and for qualifed companies within the SHFTZ was
risk management. They also enhance the expanded nationwide in November 2014. More
mechanism for cross-border circulation of the recently, qualifed frms in the SHFTZ have been
allowed to borrow up to twice their capital
RMB, boosting the supply of ofshore liquidity.
base in foreign or domestic currency through
overseas funding – double the previous limit.
What’s next?
In December 2014, the State Council announced
the creation of three new FTZs in Guangdong,
Ofshore RMB market forecasts
Fujian and Tianjin. The existence of four recently
Deutsche Bank expects the total pool of ofshore established FTZs in the country suggests that the
RMB deposits to reach 30% to RMB 3.25tn pace of reform relating to cross-border investment,
by the end of 2015, fuelled by investment and trade and fnancial market development should
currency diversifcation by companies, fnancial remain brisk.
institutions, and foreign central banks.
Additional ofshore RMB centres
The volume of ofshore RMB FX spot and
forward trading is projected to rise to USD 14bn The appointment of ofshore RMB clearing
per day from USD 12.5bn in 2014. Deutsche banks is critical to facilitating cross-border
Bank also expects the average daily turnover of settlement. Ofcial clearing banks represent
CNH cross-currency swaps to reach USD 1bn more direct access to the Chinese fnancial
by the end of 2015, while the market for CNH system, with second-order benefts for fnancial
options is expected to record an average daily institutions and customers. They also serve to
trading volume of USD 5.5-6bn, compared to raise awareness among the local business and
USD 5bn in 2014. investor communities that the local fnancial
system has the capacity to efect cross-border
RMB-denominated trade settlement fows are
RMB transactions on their behalf.
expected to grow by 17% in 2015 to RMB 7tn,
supported by the expansion of RMB business With RMB clearing banks now established
to new ofshore centres and the liberalisation in most fnancial centres in Asia, Europe, the
of cross-border fows. RMB-denominated trade Middle East and in Canada, Deutsche Bank
settlement is projected to account for 25% of expects more RMB clearing banks to be
China’s global trade by the end of 2015, up from appointed in the Americas in 2015, most likely in
21.6% in 2014. South America.
Figure 4. RMB trade settlement to rise to 25% of China’s Expansion of two-way RMB investment schemes
global trade in 2015
Further liberalisation of outward RMB fows
30 8000
7000 will serve to both increase RMB supply to the
25
6000 ofshore market and also neutralise the impact
20
5000 of RMB investment into China to improve
15 4000
equilibrium in the balance of payments.
3000
10
2000 Deutsche Bank expects both corporate outbound
5
1000 direct investment fows and the RMB qualifed
0 0 domestic institutional investor (QDII) programme
2010 2011 2012 2013 Jan-Nov 2015F
to grow at a faster pace than in 2014.
2014
RMB trade settlement (RMB bn)
The pace of quota approval under various RMB
Share of RMB trade settlement
investment programmes will likely be similar
Source: Deutsche Bank
to that in 2014. In 2014, RMB 142bn in RQFII
Expansion of Free Trade Zones in China
quota and USD 15.5bn in QFII quota was
China continues to experiment with RMB granted, as well as approximately RMB 150bn
internationalisation and capital account in quota under the PBOC’s interbank bond
liberalisation within its free trade zones (FTZs). market direct access programme. The likely
Reforms originating from the Shanghai FTZ expansion of the Stock Connect programme
(SHFTZ) have enabled companies to integrate suggests that demand for additional RQFII
quota in Hong Kong will be modest.
8 A brief guide to China’s global currency