Offshore RMB Express - Bank of China...2 Offshore RMB Express annual amount of RMB 4.21 trillion in...

Offshore RMB

Express Issue 60 ‧

February 2019

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

6

1

Editors：

Annie Cheung

Tel ：+852 2826 6192

Email : [email protected]

Matthew Leung

Tel：+852 3982 7177

Email: [email protected]

Sharon Tsang

Tel ：+852 2826 6763

Email: [email protected]

14

Market Review

Offshore RMB Express 1

I. RMB exchange rate against USD

strengthened

Following temporary easing of the trade

tensions and the US Federal Reserve

becoming dovish, RMB exchange rate

against USD strengthened in January. RMB

appreciated against USD for three

consecutive months with the greatest

monthly appreciation since February 2018.

On January 31, the RMB’s central parity rate

against the USD closed at 6.7025, up by

2.1% compared to early January. CNH

closed at 6.7099, up by 2.3% MoM,

meanwhile CNY closed at 6.7004, up by

2.6% MoM. RMB exchange rate against USD

is expected to remain two-way fluctuation or

maybe on a slightly rising trend as trade

negotiations continue, and a solid one-way

moving trend is unlikely in the near future.

On January 31, the O/N, 1-week and 3-

month CNH HIBOR rates were 1.34%,

2.00% and 3.05%, respectively.

II. Major RMB Indicators Remain

Stable

By the end of December 2018, RMB

deposits in Hong Kong amounted to RMB

615.0 billion, down by 0.4% MoM and up

10.0% YoY. Meanwhile, RMB loans

outstanding in Hong Kong were RMB 105.6

billion, down by 9.0% MoM and 26.9% YoY.

The total remittance of RMB for cross-border

trade settlement was RMB 384.9 billion in

December, down by 2.1% MoM, while the

RMB exchange rate appreciated against USD in January. Major RMB business indicators

in the offshore market remained stable. Foreign institutions’ RMB bond holdings recovered,

while monthly trading volume of Bond Connect reached a record high. Central Bank of

Myanmar officially introduced the RMB as an option for cross- border settlements. Chinese

bonds will be added to the Bloomberg Barclays Global Aggregate Index in April. The People’s

Bank of China (PBOC) announced that they would issue RMB 20 billion bills in Hong Kong

again.

Offshore RMB Market Remains

Stable

Market Review

Offshore RMB Express ２

annual amount of RMB 4.21 trillion in 2018

was up by 7.2% YoY. RTGS turnover was

RMB 24.7 trillion in January 2019, up by

16.6% MoM. There was no public issuance

of dim sum bonds in January 2019, while

there was an issuance of RMB 1.0 billion in

January 2018.

III. International status of RMB further

enhanced

In December 2018, SWIFT showed that

RMB remained at the 5th place in the

currency rankings as an international

payments currency, with a share of 2.07%

(1.60% in December 2017), behind USD,

EUR, GBP and JPY.

On January 30, 2019, The Central Bank

of Myanmar officially introduced the RMB

and JPY as settlement options for authorized

dealer license holders in cross-border

payments and transfers. A full coverage of

RMB usage in all 10 ASEAN countries has

thus been achieved. This will be a prelude to

the accelerated use of RMB in the Southeast

Asia region. The adoption of the RMB as a

settlement option allows Myanmar to

promote regional economic integration, lower

the necessary administrative cost in

exchanging USD, boost trade activities,

facilitate cross border payments and expand

economic cooperation between China and

Myanmar.

IV. Foreign allocations into RMB

bonds recovered; monthly

transaction for Bond Connect broke

record

On January 31, 2019, Bloomberg

officially confirmed that it would include

Chinese bonds into Bloomberg Barclays

Global Aggregate Index starting in April this

year. In December 2018, foreign institutions’

RMB bond holdings amounted to RMB 1.73

trillion, up by RMB 83.8 billion compared to

last month and by 50.8% YoY. The inclusion’

reflects international investors’ confidence in

the Chinese economy and also represents

an important milestone on China’s path

towards more open and transparent capital

markets. This would better serve the needs

of global investors in their deployment of

RMB funds.

Market Review


Monthly total trading volume of Bond

Connect reached a record high of RMB

132.3 billion in January 2019. Average daily

turnover surged to RMB 6.0 billion, up by

68% MoM. Global investors’ monthly net

purchase of Chinese bonds through Bond

Connect amounted to RMB 27.6 billion. This

month, Bond Connect welcomed the first

Australian asset manager into the scheme.

The investor community has now grown to

558, including different types of investors

from 24 jurisdictions.

V. Steady progress of opening-up in

domestic capital markets

According to statistics from the State

Administration of Foreign Exchange (SAFE),

by the end of January 2019, the approved

quota for RMB Qualified Foreign Institutional

Investor (RQFII) was RMB 648.7 billion, up

by RMB 2.0 billion from previous month;

while the approved quota for Qualified

Foreign Institutional Investors (QFII)

increased by USD 300 million to USD 101.3

billion. The approved quota for Qualified

Domestic Institutional Investors (QDII)

totaled USD 103.2 billion, with a total of 152

qualified domestic institutional investors

approved, same as previous month.

On January 14, 2019, SAFE expanded

the quota for QFII to USD 300 billion from

USD 150 billion. On January 30, PBOC said

they would issue RMB 20 billion bills through

the Central Moneymarkets Unit of the Hong

Kong Monetary Authority, the second

issuance in Hong Kong following the one in

November last year.

Policy and Peers Updates


China further opens up financial markets On January 14, the State Administration of Foreign Exchange announced to double

the quota for the Qualified Foreign Institutional Investors (QFII) program to USD 300

billion. Subsequently, on January 31, the China Securities Regulatory Commission was

said to solicit public comments on consolidating the QFII program and the RMB Qualified

Foreign Institutional Investors (RQFII) program. The revisions would include: 1) QFII and

RQFII schemes are to merge, and foreign institutions will make a one-time application for

the qualification status; 2) qualification requirements are to relax; 3) scope of investment

is to expand. Investors will not only be allowed to buy the products within the current

investment scope, but also listed equities on the New Third Board, bond repurchases,

private investment funds, financial futures, commodity futures, options, etc.; 4)

management of custodians is to optimize; and 5) Ongoing supervision is to enhance.

Chinese bonds to be included in the Bloomberg Barclays Global Aggregate

Index

Bloomberg confirmed on January 31 that Chinese RMB-denominated sovereign and

policy bank bonds will be added to the Bloomberg Barclays Global Aggregate Index

starting April 2019 and phased in over a 20 month period. Using data as of January 24,

the index would include 363 Chinese bonds and represent 6.03% of a USD 54.07 trillion

index upon completion.

PBOC cut RRR

In order to support real economy and reduce funding cost, the PBOC cut the RRR by

0.5 percentage point respectively on 15th and 25th January, with net liquidity injection of

RMB 800 billion.

Policy and Peers Updates


CBM included RMB and JPY as official settlement currencies

On January 30, the Central Bank of Myanmar (CBM) announced that Authorized

Dealers license holders are permitted to use RMB and JPY in international payments and

settlements. Nevertheless, account opening for individuals or legal entities in these two

currencies is still prohibited.

PBOC issued sovereign bills in Hong Kong again

On February 13, the People’s Bank of China (PBOC) issued RMB bills through the

Central Moneymarkets Unit of the Hong Kong Monetary Authority. The issuance

contained RMB 10 billion 3-month bills and RMB 10 billion 1-year bills priced at 2.45%

and 2.80%, respectively.

Special Topic


Kam LIU, Analyst

Reform measures

The QFII scheme and the RQFII scheme

were originally launched in 2002 and 2011 to

support China’s capital markets opening.

Since then, China refined QFII and RQFII to

attract foreign investment by broadening the

investable universe, expanding the QFII and

RQFII quotas, changing qualification

thresholds and streamlining quota approval

process. Chinese regulators have also

gradually expanded the scope of foreign

institutional investors under these two

schemes to commercial banks, insurance

companies and other financial institutions as

well as medium and long-term investors

approved by the Chinese Central Bank.

Since 2015, reforms in QFII and RQFII

have deepened. In July 2015, PBOC allowed

three types of institutions, including foreign

banks, international financial organizations

and sovereign wealth funds, to enter the

interbank market and to carry out

transactions such as bond repurchase, bond

lending, bond forward, and interest rate

swaps, with no restrictions on the scale of

investment. In June 2018, China eased major

restrictions on QFII and RQFII, including

eliminating the monthly 20% repatriation limit

imposed on the QFII scheme, removing the

lock-up restrictions applicable to the

investment principal, and allowing QFIIs and

RQFIIs to enter onshore forex hedging

transactions to hedge currency risks. On

QFII and RQFII Undergoing

Further Reforms

Entering 2019, China is ramping up efforts to open its capital markets. On January 31, The

China Securities Regulatory Commission (CSRC) announced that it would ease foreign institutions’

access by combining two inbound investment schemes -- the Qualified Foreign Institutional

Investors (QFII) program and the RMB Qualified Foreign Institutional Investors (RQFII) program,

while broadening their investment scope to include derivatives, bond repurchases and private funds.

The deregulation on QFII and RQFII schemes will help introduce long-term capital, optimize investor

structure, and promote the opening-up as well as the healthy development of China’s capital

markets.

Special Topic


January 14, 2019, China doubled QFII quota

to USD 300 billion to meet demands from

overseas investors to expand investment in

China's capital markets.

QFII and RQFII in need of further

improvements

The encouraging developments of QFII

and RQFII produce positive results. As of

2018, total QFII quota reached USD 150

billion (currently USD 300 billion), and the

aggregated quota of USD 101.1 billion have

been granted to 309 QFIIs. RQFII has

expanded from Hong Kong to 19 countries

and regions. Total RQFII quota has reached

RMB 1.94 trillion, and the aggregated quota

of RMB 646.7 billion has been granted to 233

RQFIIs. The two schemes have been

operating in a steady manner, playing a

positive role in channeling long-term foreign

capitals into China, optimizing investors'

structure of the capital markets, carrying out

value investing, enhancing corporate

governance of listed companies, and

promoting the sound and steady

development of China's capital markets.

However, there still exist some

obstacles in QFII and RQFII, and further

improvements are needed to accommodate

the rapid development of China’s capital

markets.

Firstly, separate measures and

provisions of QFII and RQFII schemes

require overseas institutions to make two

applications. In addition, QFII sets stricter

quantitative criteria including requirements

on operating life and asset scale, while

RQFII has less stringent criteria and only

compliance requirements. Separate

provisions of QFII and RQFII will not only

complicate the investment process, but also

result in regulatory arbitrage.

Secondly, the surging enthusiasm of foreign

investors and increasing inflows of overseas

capitals require more investment facilitation

under QFII and RQFII. It can be clearly seen

that foreign holdings of RMB assets are

rising significantly since 2016 on the back of

China’s opening policies. By the end of 2018,

overseas investors hold RMB 1.15 trillion of

Chinese stocks and RMB 1.71 trillion of

Special Topic


Chinese bonds. CSRC pointed out that, with

two-way opening of the capital markets and

the economic restructuring underway, current

QFII and RQFII provisions are no longer

adaptable to the new environment of capital

markets in terms of qualification criteria,

investment operation, and ongoing

supervision.

New rules of QFII and RQFII

In order to channel more long-term

foreign capitals into China and further open

up its capital markets, regulators make

significant revisions on QFII and RQFII.

Firstly, separate QFII and RQFII

schemes are to merge. According the new

rules, foreign institutions shall make a one-

time application for the qualification status.

Meanwhile, institutions from countries and

regions without RQFII quota can only make

investments with funds raised in foreign

currencies.

Secondly, qualification requirements are

to relax. The quantitative criteria are

removed, whereas the compliance

requirements and the requirements on the

types of institutions are maintained.

Meanwhile, application documents are

simplified, and the review process

streamlined.

Thirdly, scope of investment is to expand.

Currently, foreign investors under the

scheme are allowed to buy Chinese stocks

and bonds, but the new rules greatly expand

their investment scope. Investors will be

allowed to buy securities traded on China’s

main over-the-counter equity market, the

New Third Board, and also invest in private

funds or conduct bond repurchase

transactions. In addition, foreign institutions

will also gain access to derivatives, including

financial futures, commodity futures and

options. Qualified investors are also allowed

to participate in margin trading and securities

lending in stock exchanges.

Fourthly, management of custodians is

to optimize. The management of QFII

custodian qualification will be shifted from an

approval-based item to a registration-based

item, and the new rules remove the

restriction on the number of custodians

appointed by a QFII.

Fifthly, ongoing supervision is to

enhance. The new rules improve QFII

account management, monitoring and

oversight mechanisms, require additional

disclosure of information on cross-border

transactions, and specify penalties.

Special Topic


Further opening-up of China’s capital

markets ahead

The consolidation of QFII and RQFII can

help streamline the approval process,

encouraging the repatriation of offshore RMB

funds. The relaxed qualification criteria and

the expansion of investment scope would

facilitate overseas investors to diversify their

allocation. On top of that, overseas investors

can manage their investment risks by using

derivatives. In a word, the QFII and RQFII

programs have been developing steadily and

played a positive role in introducing long-

term capitals, optimizing investor structure,

improving corporate governance of listed

companies and promoting

internationalization of the capital markets.

It is noteworthy that, besides revisions to

QFII and RQFII, infrastructures and

institutional arrangements for overseas

investment are being improved to lend

support to the further opening and healthy

development of China’s capital markets.

On one hand, tax policy for investing in

the China’s bond market has been clarified to

facilitate the investment of overseas

institutions, while onshore credit rating

business is recently opened up to foreign

ownership to promote the development and

trustworthiness of China’s credit ratings

services.

On the other hand, global index

companies will gradually include RMB assets

into their baskets, which could trigger inflows

worth of USD 0.2 - USD 0.3 trillion in the

short term and USD 0.5 - USD 1 trillion in the

longer term. Index provider MSCI has

already implemented an initial 5 percent

inclusion of China A shares in its China

indexes and related composite indexes, and

is proposing an increase of MSCI China A

large-cap securities to 20 percent of their

respective free float-adjusted market

capitalizations. Bloomberg have also

confirmed that Chinese RMB-denominated

government and policy bank securities will be

added to the Bloomberg Barclays Global

Aggregate Index starting April 2019,

representing about 6 percent of the index. It

is expected that infrastructures and

institutional arrangements will be further

optimized to facilitate foreign investment into

China’s capital markets.

Special Topic


Ricky CHOI, Senior Economist

Pursuing progress while ensuring

stability is the key theme for 2019

In the recent Politburo meeting, 2019 is

regarded as a pivotal year for securing a

decisive victory in finishing the building of a

moderately prosperous society in all respects.

Ensuring stable growth is one of the top

priorities for the Chinese government, and

should continue to uphold the underlying

principle of pursuing progress while ensuring

stability. Moreover, China will continue to

promote high-quality development,

implement proactive fiscal policy and prudent

monetary policy, and move to stabilize

employment, finance, foreign trade, foreign

investment, domestic investment and

expectations to ensure its economy to

maintain steady and higher quality growth

ahead.

Policy Support to Ensure Stable

Growth in 2019

China’s real GDP growth held largely steady at 6.6% in 2018, moderating from a downwardly

revised 6.8% in 2017. Growth momentum slowed in 2H 2018 amid escalating China-US trade

frictions and volatilities in the financial markets, with the quarterly growth showed gradual

deceleration from 6.8% in Q1 and 6.7% in Q2 to 6.5% in Q3 and 6.4% in Q4. Besides, nominal GDP

also moderated from 10.9% in 2017 to 9.7% in 2018, with the overall economic output reached RMB

90.0 trillion, equivalent to around RMB 64,500 per capita.

Special Topic


Fiscal policy to take the front seat to

drive growth. Both the domestic and

external headwinds are likely to persist in

2019. After several rounds of monetary

easing measures, expansionary fiscal policy

is likely to hold the key to support the

domestic economy in 2019, including an

individual income tax reduction for

households, tax and fee reductions for

corporates (value-added tax (VAT),

corporate income tax, corporate fee), tariff

cuts and higher tax rebates for exports,

higher infrastructure spending, as well as

subsidies on automobiles and home

appliances consumption, etc.

More targeted monetary easing

expected. Since the beginning of 2018,

PBOC has announced numerous measures,

including a total of six targeted required

reserve ratio (RRR) cuts (including twice in

January 2019), increasing the size of re-

discount and re-lending facilities by RMB 400

billion, launching the targeted medium

lending facility (TMLF) and establishment of

a credit enhancement facility to promote

corporate bond financing by private

enterprises, to lower the funding costs, and

ensure adequate credit flows, in particular for

those private enterprises, and small and

micro-sized companies, to support the real

economy.

Growth moderation in 2019

Looking ahead, further moderation in

China’s economic growth is expected in 2019,

with more notably deceleration in the

beginning of the year followed by some

recovery later in the year. Growth

momentum is expected to be hindered in the

near term by existing tariffs and the

uncertainties related to their negotiation

outcome. The external trade performance for

2019 will largely hinge on the negotiation

outcome between China and the US, and the

overall global economic conditions. Any

potential trade deal will likely involve

substantial efforts to reduce trade

imbalances between China and the US, with

China importing significantly more US

products. Hence, China’s trade surplus will

likely contract further with or without a deal.

On the domestic front, weakness in retail

sales might be of concern, but retail sales

excluding auto sales have been rather stable.

In 2019, it is expected that consumption will

likely remain stable, benefiting from the

recent individual income tax and import tariffs

reductions as well as the largely steady labor

market. In addition, a number of high growth

consumer service sectors, including tourism,

household services, healthcare services, etc.

have performed well over the past few

Special Topic


quarters. With the support of services

consumption, consumption will remain the

key driver for the economic growth ahead.

Meanwhile, investment growth might slow

further in early 2019, with real estate

investment likely cooling on the back of

slowing housing transactions under the

government policy stance. Manufacturing

investment will likely peak, given some

manufacturing industries, in particular heavy

industry, are still facing the problem of

excess capacity, and weak business

confidence amid uncertain economic outlook.

Infrastructure investment is likely to take up a

bigger role in driving investment as well as

overall economic growth. However,

infrastructure investment has already

reached a sizable scale. The marginal effects

from accelerating new infrastructure

investment will likely be diminishing.

Overall, the government still has

sufficient policy tools to stabilize growth in

2019, such as tax cuts, infrastructure

spending and subsiding automobiles and

home appliances consumption on the fiscal

policy front, as well as more targeted

monetary easing. It is believed that China’s

economy will only ease slightly to around

6.4% in 2019, remaining on the right track to

achieve the objective of building a

moderately prosperous society in all respects

in 2020. On the pricing front, the impact of

tariffs and African swine fever are expected

to boost the consumer price index somewhat

further, but the overall inflation should remain

under control.

Chart Book


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


CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)

CNH & CNY China Sovereign Curve (%, 31 Jan 2019)

FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

End of Jan:

End of Jan:

Chart Book

Offshore RMB Express

October 2016 December 2018

40.55% USD #1

EUR 32.26% #2

GBP 7.61% #3

JPY 3.38% #4

2.07% CAD

EUR 32.98% #2

GBP 6.76% #3

JPY 3.36% #4

#5 1.82% #5 CAD

CNY #6 1.67%

USD #1 41.57%

1.84% #6

AUD

CNY

#7 1.57%

HKD #8 1.44%

16

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.

Please follow BOCHK Research on WeChat for the latest economic and financial markets analyses

Offshore RMB Express - Bank of China...2 Offshore RMB Express annual amount of RMB 4.21 trillion in...

Documents

Transcript of Offshore RMB Express - Bank of China...2 Offshore RMB Express annual amount of RMB 4.21 trillion in...