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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 : [email protected]

Kera Kong

Tel：+852 2826 6205

Email: [email protected]

Sharon Tsang

Tel ：+852 2826 6763

Email: [email protected]

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


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


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


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


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


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.

10

Special Topics


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

Special Topics


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.

13

Special Topics


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


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


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


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 (%, 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


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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