Post on 10-Oct-2020
Offshore RMB
Express Issue 50‧
April 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 : anniecheung@bochk.com
Kera Kong
Tel:+852 2826 6205
Email: kerakong@bochk.com
Sharon Tsang
Tel :+852 2826 6763
Email: sharontsang@bochk.com
18
Market Review
Offshore RMB Express 1
1. Offshore RMB exchange rate
continued to rise
In 1Q 2018, the RMB appreciated strongly
against the U.S. dollar. CNY appreciated by
3.7%, the highest quarterly increase since
1Q 2008, while CNH appreciated by 3.9%.
The central parity rate of the RMB rose
above 6.28, a record high since the "August
11th" exchange rate reform. On March 29,
CNH appreciated by 1.08% for the month
and closed at 6.2626, while CNY appreciated
by 0.63% to 6.2911. The trend of US dollar
exchange rate and China's economic
fundamentals were still the dominant factors
affecting RMB’s exchange rate. In the first
quarter, the cumulative depreciation of the
US dollar was around 2.5%. The RMB’s
exchange rate is expected to remain stable
and rise in the short to medium term. As for
HIBOR fixing, CNH HIBOR fixing rates were
relatively stable in March. On March 29, the
O/N, 1-week and 3-month CNH HIBOR rates
were 2.534%, 3.118% and 4.305%,
respectively.
2. Major RMB business indicators
remained stable
By the end of February 2018, RMB
deposits in Hong Kong increased by 0.7 %
MoM to RMB 550.4 billion. The total
remittance of RMB for cross-border trade
settlement decreased to RMB 301.6 billion in
February, down by RMB 71.8 billion from the
previous month of RMB 373.4 billion. In
February 2018, Taiwan’s offshore market
RMB deposits decreased by RMB 2.02 billion
(0.62% MoM) to RMB 321.88 billion, ending
a consecutive growth of 9 months.
In March, the exchange rates of both onshore and offshore RMB against the US dollar
(CNY and CNH) continued to perform strongly, and major offshore RMB business indicators
remained stable, while cross-border trade settlement volume slightly decreased due to the
Lunar New Year. However, offshore RMB bond markets showed signs of further recovery.
International usage of RMB was increasing, while domestic capital markets were further
opening up, supporting RMB internationalization’s steady development in the long term.
Offshore RMB Market Becomes
More Balanced
Market Review
Offshore RMB Express 2
According to SWIFT report, due to seasonal
factors of the Lunar New Year, the RMB’s
market share in global payments decreased
by 0.1% to 1.56% MoM in February 2018.
The RMB dropped two places to number 7 in
the currency rankings for global payments in
the same month. In March 2018, RTGS
turnover increased by 17.4% MoM to RMB
18 trillion.
3. Dim Sum bond market significantly
improved compared to corresponding
period last year
Since the beginning of this year, the RMB
exchange rate has been stable and on the
rise, increasing the attractiveness of RMB-
denominated assets. Meanwhile higher
domestic market interest rate has been
increasing the issuing cost in China. Demand
for RMB bonds in the offshore market is
expected to increase. As of March 2018, the
issuance of Dim Sum bond was RMB
11.28 billion, which increased
substantially from RMB 630 million in the
same period of last year. The number of
Chinese enterprises issuing RMB bonds
overseas has increased significantly,
including central government-owned
enterprises, state-owned enterprises and
real estate companies.
4. RMB's function as a reserve
currency continued to rise
As of the end of March 2018, the
balance of bond custody of overseas
institutions in China’s interbank bond market
reached RMB 1.3 trillion, continuing to set
new records. Monthly new holdings
amounted to RMB 28.2 billion, slowing for a
second consecutive month. This is the 13th
Market Review
Offshore RMB Express 3
consecutive month for foreign institutions to
increase their holdings of RMB bonds.
According to IMF statistics dated Mar 30th,
the RMB foreign exchange reserve increased
for two consecutive quarters. As of the fourth
quarter of 2017, RMB foreign exchange
reserves increased from USD 108.4 billion in
the third quarter to USD 122.8 billion,
accounting for 1.23% of the total allocated
foreign exchange reserves, compared to
1.12% in 3Q 2017 and 1.08% in 4Q 2016.
5. Domestic capital markets opened
further
According to statistics from the State
Administration of Foreign Exchange (SAFE),
the approved quota for RQFII totaled RMB
615.4 billion as of March 29, up by RMB 3
billion compared to last month, with a total of
196 qualified foreign institutional investors
having been approved. At the same time, the
approved quota for QFII totaled USD 99.4
billion, with a total of 286 qualified foreign
institutional investors approved. The number
of QFIIs remained the same as last month,
while investment has increased by USD 200
million. In addition, the approved quota for
QDII totaled USD 90 billion as of March 29,
with a total of 132 qualified foreign
institutional investors 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 28 months.
Policy and Peers Updates
Offshore RMB Express 4
China to merge CBRC and CIRC
The proposal of reforming China financial regulatory framework was introduced on
March 13. Based on the proposal, the China Banking Regulatory Commission (CBRC)
would be merged with the China Insurance Regulatory Commission (CIRC). The merged
entity would report directly to the State Council, and take an integrated role in regulating
banking and insurance sectors. Meanwhile, the function of making important laws and
prudential regulatory system by the merged entity would be transferred to the People’s
Bank of China (PBOC). Other than that, the China Securities Regulatory Commission
would remain a separate entity.
The CIRC and the CBRC were established in 1998 and 2003, respectively. They
were both separated from the relevant divisions of the PBOC. The drawbacks of
segregated regulation gradually emerged in recent years, facilitating the latest financial
regulatory reform.
China’s crude oil futures officially launched
On March 26, China’s crude oil futures was listed on the Shanghai International
Energy Exchange. The futures contract is denominated in the RMB with trading unit of
1,000 barrels per contract. It would be available to foreign investors, exchanges and
petroleum companies, facilitating the influences of Chinese enterprises and exchanges
on international oil prices.
BOC assisted Philippines to issue RMB 1.46 billion sovereign panda bonds
On March 20, Bank of China (BOC), with the mandate as lead underwriter and
bookkeeper, assisted the Philippines government to issue RMB 1.46 billion panda bonds
in China’s interbank market. The bonds carried a coupon rate of 5.00% with maturity of 3
years. Until now, the British Columbia Provincial Government of Canada, Hungary,
Poland, South Korea and Sharjah of the United Arab Emirates have issued sovereign
RMB bonds in China’s interbank bond market.
Policy and Peers Updates
Offshore RMB Express 5
Chinese bonds to join Bloomberg Barclays Global Aggregate Index
On March 23, Bloomberg announced that it will add Chinese RMB-denominated
government and policy bank securities to the Bloomberg Barclays Global Aggregate
Index. The addition of these securities will be phased in over a 20-month period starting
April 2019. Meanwhile, several planned operational enhancements will be implemented
by the PBOC and the Ministry of Finance.
Daily quotas of the Stock Connect between the Mainland and Hong Kong
are set to increase
The China Securities Regulatory Commission and the Securities and Futures
Commission jointly announced that effective from May 1, the daily quotas under
Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect will
increase by 4 times. The new daily quota for each of the northbound trading links will be
RMB 52 billion, while the new daily quota for each of the southbound trading links will be
RMB 42 billion.
Special Topics
Offshore RMB Express
Reform proposal by the State Council gained market attention during the Two Sessions.
Based on the proposal, the China Banking Regulatory Commission (CBRC) would be
merged with the China Insurance Regulatory Commission (CIRC). The merged entity
would report directly to the State Council and take an integrated role in regulating banking
and insurance sectors. Meanwhile, the function of making important laws and regulations
by the merged entity of the CBRC and the CIRC would be transferred to the People’s
Bank of China (PBOC). The latest reform of financial regulatory framework is another
major step in integrating and coordinating regulation across financial sectors in the
Mainland, following the establishment of the Financial Stability and Development
Commission (FSDC). The latest reform also reflects that regulatory model in the Mainland
will be towards the combination of prudent, behavioral and functional approaches.
Kam LIU, Analyst
The Direction and Impact of
Reforming Financial Regulatory
Framework in the Mainland
7
I. Historical transformation of
financial regulatory system in the
Mainland
From 1978 to nowadays, financial regulatory
system in the Mainland experienced various
transformations, and it can be divided into 3
stages.
First stage: Integrated regulation before
1992
In 1978, the PBOC was separated from the
Ministry of Finance. In 1986, the State Council
legally clarified the central banking and
financial regulatory functions of the PBOC,
forming an integrated regulation with the PBOC
taking responsibility of the supervision of all
financial businesses, such as banking, trustee,
securities, insurance, etc.
Special Topics
Offshore RMB Express 8
Second stage: Segregated regulation
between 1992 and 2009
The State Council Securities Commission
was established after 1992. The importance
of preventing and resolving financial risks
was more emphasized after the Asian
Financial Crisis. The CIRC and the CBRC
were established successively, indicating a
formal establishment of segregated
regulation with a structure of “one central
bank plus three regulatory authorities”. There
were several advantages for segregated
regulation. The professionalism,
standardization and specification of
regulation strengthened substantially.
Third stage: Coordinated regulation
since 2009
Channel business and shadow banking
have grown rapidly in recent years, resulting
in the extension of capital chain and
increasing systemic financial risks. Against
the backdrop of mixed business operation,
overlapping of regulatory functions and
regulatory vacuum have emerged under
segregated regulatory approach.
Consequently, the regulatory model in the
Mainland has to transform from segregated
approach to coordinated approach. During
the National Financial Work Conference in
July 2017, there was an announcement that
the FSDC would be established at the State
Council in order to fulfill the function of
“coordination”.
II. References from international
regulatory systems and implications for
the Mainland
Since the global financial crisis, advanced
economies successively reformed their
financial regulatory systems and transformed
from traditional multi-authorities model to
twin peaks model, or even towards
integrated model. At present, there are three
major regulatory models in the world.
1. Regulatory model dominated by
super central bank
Under this model, the central bank takes
the responsibilities of implementing monetary
policy and prudential regulation. In addition,
behavioral regulatory authority is set up for
promoting positive competition and
protecting the interests of investors. For
example, the US developed a regulatory
system in 2010 which was dominated by the
Federal Reserve Board with the
establishment of the Financial Stability
Oversight Board at the same time. The UK
adopts a “twin peaks” model with the
Special Topics
Offshore RMB Express 9
combination of “central bank plus behavioral
regulatory authority”. The Bank of England is
given a core status in maintaining financial
stability. Meanwhile, a separate entity, the
Financial Conduct Authority, was established
to protect the interests of customers.
2. An integrated financial regulatory
division separate from the central bank
undertakes major regulatory functions
Separation of monetary policy and
financial regulation is the feature of this
model. Financial regulation in Japan is
dominated by the Financial Services Agency,
while the Bank of Japan is responsible for
implementing monetary policy. In Germany,
the Federal Financial Supervisory Authority
is the most important financial regulatory
institution.
3. Multi-authorities regulatory
framework
Canada is the major representative of this
regulatory model. The Bank of Canada and
other financial regulatory institutions are
independent from each other. Financial
regulatory functions are excluded from the
central bank’s functions, while macro-
prudential policy making and implementation
are jointly conducted by multiple authorities.
Based on the current situation in China,
an integrated regulatory framework
combining the central bank and
regulatory institutions, represented by
the UK and the US, is more valuable for
China’s reference. The PBOC once stated
that segregated regulation was inappropriate
for the trend of integrated business operation,
identifying it as a culprit of the outbreak of
global financial crisis. The PBOC believed
that, as the central bank takes part in rescue
function during financial crisis, the central
bank needs to participate in daily regulation
and assume a core role in preventing
systemic financial risks.
III. Reasons and impacts of
reforming financial regulatory
framework in the Mainland
1. Reasons of merging the CBRC and
the CIRC
The reasons of merging the CBRC and the
CIRC are mainly due to convergence of
business operating nature, deepening
cooperation and similarities in regulatory
philosophy between banking and insurance
sectors. The direct effects of merging the two
entities are to reduce communication costs,
enhance regulatory efficiency, and make up
for the shortfall in regulatory vacuum, etc.
Special Topics
Offshore RMB Express
2. Financial regulatory reform
strengthens the PBOC’s function of
macro-prudential management and
further consolidates the twin pillars
management framework.
Another significant change of the latest
reform is that the function of making
important laws and prudential regulatory
system by the merged entity of the CBRC
and the CIRC is transferred to the PBOC.
According to the explanation from the PBOC,
the purposes of this change are to separate
the functions between development and
supervision as well as between regulation
and implementation. In addition, the PBOC
can conduct penetrative regulation on cross
market financial products through unifying
standards and rules on same types of
products. It would be conducive to preventing
and resolving systemic financial risks.
After reorganizing the functions of
financial regulation, the PBOC’s
regulatory authority would further expand
with strengthening macro-prudential
management. Hence, the twin pillars
management framework combining
monetary and macro-prudential policies
would be consolidated.
3. Financial regulatory system in the
Mainland gradually improves, reflecting
the feature of twin peaks model to a
certain extent
The function of the PBOC would be
obviously strengthened after the latest
reorganization. In the future, the merged
entity of the CBRC and the CIRC will only
take part in implementation, such as micro-
prudential management, investor protection,
etc. In general, the latest reform officially
gives the PBOC macro-prudential regulatory
power on maintaining financial stability.
Meanwhile, regulatory objectives and
functions of the merged entity of the CBRC
and the CIRC are clearly defined.
Accordingly, the reorganization reflects the
feature of twin peaks regulation, with the
core of prudential and behavioral approaches,
to a certain extent.
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Special Topics
Offshore RMB Express
IV. Impacts of reforming financial
regulatory system on macro
environment
In terms of the real economy, the
improving financial regulatory system helps
optimize the allocation of funding source,
reduce funds circulation in the capital
markets, and transmit funds to the real
economy.
In terms of financial markets, the
coordination between financial regulatory
institutions facilitates penetrative regulation
on financial products and funds circulation. It
would be effective to compress the capital
chain and reduce financial leverage,
promoting more sound and transparent
operation in financial markets.
11
14
Special Topics
Offshore RMB Express
Analysis of the Cross-border
Transfer of Non-performing
Assets Pilot Scheme in Shenzhen
Jian YING, Senior Economist
In 2013, the People's Bank of China announced the “Circular on Simplifying Cross-
Border RMB Business Processes and Improving Related Policies” to encourage
domestic banks to conduct cross-border RMB trade financing operations. Domestic
banks can carry out cross-border transfer of RMB trade financing assets.
The establishment of the Guangdong Free
Trade Zone continued to promote cross-
border asset transfer business. The overall
plan of the Guangdong Free Trade Zone
proposes that under the framework of CEPA,
research of the financial institutions in the
Pilot Free Trade Zone and peers in Hong
Kong and Macao should be carried out to
launch cross-border RMB credit asset
transfer business. The subject of transferable
assets has been expanded from trade
financing to other credit assets.
Since the second half of 2015, fluctuations
of the RMB exchange rate have increased,
and the regulator has supported the inflow of
funds. On the other hand, the regulator has
highlighted the importance of prevention and
control of financial risks, guiding banks to
reduce non-performing loans and activate
their stock of funds. In this context, the
transfer of cross-border non-performing
assets has become a new exploration
direction, and Shenzhen has seized this
opportunity. In December 2016, with the
approval of the State Administration of
Foreign Exchange, the Metrobank (China), a
foreign based bank, listed a bundle of assets
package on the Shenzhen Qianhai Financial
Assets Exchange (QEX) and successfully
transferred it to the Philippine Metrobank. It
became China’s first cross-border non-
performing asset transfer.
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Special Topics
Offshore RMB Express
Subsequently, the State Administration of
Foreign Exchange issued the “Reply on the
launching of pilot banks for cross-border
transfer of non-performing assets in
Shenzhen Branch”, and authorized the
Shenzhen Branch to review the application
for the pilot business of cross-border transfer
of banks’ non-performing assets submitted
by the institutions in the area, on a case by
case basis and with transaction limitation".
The main contents include:
1. It is limited to banks in Mainland China
transferring non-performing assets overseas.
The transaction currency is not limited, and
the currency type can be freely selected. The
transferee must be overseas institutional
investors.
2. The legal relationship of assets to be
transferred should be as simple and clear as
possible and preferably without creditor
seniority disputes. The underlying assets
should not be too complex and should avoid
sensitive industries and entities such as the
real estate industry and government
financing platforms.
3. Applicants for transfer of non-performing
assets shall apply to the Shenzhen Branch of
the State Administration of Foreign
Exchange for approval of each transfer of
non-performing assets. After approval, they
shall apply for procedures such as cross-
border financing contract registration,
opening and closing external debt accounts,
cross-border payment and exchange of
funds, and cross-border financing registration
cancellation and so on.
4. Banks within the jurisdiction of
Shenzhen can directly apply and can also
apply for the above procedures through
Qianhai Financial Assets Exchange (QEX).
Banks in other parts of the Mainland should
go through the above procedures via the
Qianhai Financial Assets Exchange. If the
above procedures are handled by the QEX,
the relevant non-performing assets shall be
listed and transferred on the QEX.
5. The Shenzhen Branch of the State
Administration of Foreign Exchange takes
supervision responsibility for the pilot
business.
14
Special Topics
Offshore RMB Express
Some progress has been made in the
transfer of cross-border non-performing
assets in Shenzhen. Qianhai Financial
Assets Exchange has handled 4 non-
performing asset transfers in aggregate,
totaling RMB 1.02 billion.
The following reasons make the Qianhai
Financial Assets Exchange popular.
Firstly, there are more market
opportunities through platform transfer. The
Qianhai Financial Assets Exchange provides
a cross-border matchmaking platform that
allows overseas agencies to have extensive
access to different types of domestic
institutions and assets. For asset transferors,
trading on the platform increases the
selectivity.
Secondly, the platform of the Qianhai
Financial Assets Exchange provided clearer
operational guidelines. The “Cross-border
Link” of the QEX is a trading system
independently developed by the QEX. It is
directly linked to the central registration
database of the Banking Credit Assets
Registration and Circulation Center
(“Yindeng Center”) to provide non-standard
cross-border asset transfer services for
domestic and foreign institutions, including
information disclosure, transaction
integration, fund supervision, asset
registration, data statistics and other
intermediary services.
Thirdly, the regulators endorsed to ensure
the rights of foreign investors. The "Cross-
border Connect" system was jointly accepted
by 6 institutions, namely, the State
Administration of Foreign Exchange, the
Shenzhen Branch of the People's Bank of
China, the Shenzhen Branch of the State
Administration of Foreign Exchange, the
Shenzhen Office of the China Banking
Regulatory Commission, Shenzhen
Municipal Government Financial Services
Office and the Authority of Qianhai, thus
increasing the confidence of overseas
institutions.
The transfer of cross-border non-
performing assets is a potential business for
overseas financial institutions, which can
promote diversified development of RMB
business and provide another asset-liability
matching channel.
First of all, the new business can increase
the yield of RMB business. It is estimated
that the stable rate of return of non-
performing assets in the Mainland can reach
13% to 15%.
15
Special Topics
Offshore RMB Express 16
Next, non-performing asset transfer has
developed rapidly, and there are more
business opportunities in the Mainland
market. The non-performing loan balances of
commercial banks in 2016 and 2017 were
RMB 1.51 and 1.71 trillion, respectively. In
addition, non-bank financial institutions and
corporate entities have to deal with bad
assets. It is estimated that the market scale
of the non-performing assets will reach RMB
4.8 trillion by 2020. As this cycle of non-
performing asset growth is the result of the
promotion of supply-side reform in the
Mainland, the risk of participating in cross-
border asset transfer is controllable.
Furthermore, the disposal of non-
performing assets is becoming increasingly
mature and has greater selectivity.
However, as the transfer of cross-border
non-performing assets is an innovation in the
RMB business, the supporting policies and
practical operations are in the phase of
exploration. It is inevitable that some
problems will arise in the course of business
development, including regulations,
operating procedures, and excessive
taxation issues, all of which will require
system innovation to resolve, thus
encouraging more domestic and foreign
financial institutions to participate in this
business.
Chart Book
Offshore RMB Express 18
Market Indicators
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 19
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
CNH & CNY China Sovereign Curve (%, 30 Mar 2018)
FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
End of Mar:
End of March:
Chart Book
Offshore RMB Express
January 2016 February 2018
42.96% USD #1
EUR 29.43% #2
GBP 8.66% #3
JPY 3.07% #4
1.64% CNF
EUR 34.29% #2
GBP 7.34% #3
JPY 3.29% #4
#5 2.45% #5 CNY
CAD #6 1.74%
USD #1 38.00%
1.57% #6
CNY
CAD
#7 1.56%
AUD #8 1.48%
20
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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