| Global Research | CNH Introducing the Renminbi Globalisation … · On the Ground GR12AU | 14...

Important disclosures can be found in the Disclosures Appendix

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Kelvin Lau, +852 3983 8565

[email protected]

David Mann, +1 646 845 1279

[email protected]

Marios Maratheftis, +971 4 508 3311

[email protected]

Sophii Weng, +1 212 667 0472

[email protected]

| Global Research | 00:01 GMT 14 November 2012 |

CNH – Introducing the Renminbi Globalisation Index

We launch the Standard Chartered RGI, which tracks the Renminbi’s level of globalisation

We also introduce our Offshore Renminbi Corporate Survey of local and global corporates

As the CNY heads towards global reserve currency status, its broader use as a trade currency will be key

Our measure of internationalisation has risen more than seven-fold since end-2010

Singapore and London now each account for just over 10% of the RGI universe; Taiwan is next

Our first Offshore Renminbi Corporate Survey shows strong appetite for offshore Renminbi activity

China‟s re-entry into the global economy was arguably the most important economic

development of the past 30 years. One of the next major steps for China as it

redefines its position in the world economy will be the emergence of the Chinese

yuan (CNY) as a dominant currency in international trade and as a reserve currency.

In this regard, rapidly increasing use of CNY for trade settlement and exponential

growth in the offshore Renminbi (CNH) market are important milestones.

We have developed a new index to measure the extent of Renminbi internationalisation:

the Standard Chartered Renminbi Globalisation Index (RGI). This index will allow us to

track the ups and downs in the internationalisation process. We also introduce a

comprehensive survey of local and global corporates that will help us to track the

motives for, and next steps in, using the Renminbi offshore. We find a strong appetite

among survey respondents to use the CNH market for China-related business. We will

publish updates of the survey results quarterly and of the RGI once a month. Ultimately,

we expect use of the CNH to reach a level to rival other reserve currencies.

This report is divided in three parts. Part I discusses the characteristics of major

reserve currencies in history and compares them to the CNY today. Part II introduces

the Standard Chartered RGI and the corporate survey, while Part III analyses their

results. The Appendix provides technical details on how the RGI is constructed.

Figure 1: The RGI has grown more than seven-fold since December 2010

Note 1: An index base of 100 was set for Dec-2010, initially covering Hong Kong only

Note 2: Singapore and London became Eligible Markets and were added to the RGI in Aug-2012

Note 3: Brief pauses in the RGI uptrend in Q4-2011 and Q1-2012 reflect a period of caution and market

consolidation following late Q3-2011 market turbulence triggered by global risk aversion

Source: Standard Chartered Research

0

100

200

300

400

500

600

700

800

Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Index as of Sep-2012 = 735

HK HK + SG + LDN

+46%

1

2

3

On the Ground

GR12AU | 14 November 2012 2

I. Lessons from history for the CNY

Reserve currency status has many benefits (and pre-conditions)

The Renminbi‟s move towards reserve currency status could eventually lead to a

truly multi-polar world in terms of reserve currencies, away from the current

USD-dominated system. This would fundamentally alter the global financial system in

a way not seen since the start of the Bretton Woods era in 1945.

Being a country with global reserve currency status carries major benefits. First, such

a country is considered a safe haven in times of global risk aversion, even if it is the

cause of the risk aversion. Second, wide international acceptance of a country‟s

currency means it benefits from the famously described „exorbitant privilege‟ (a term

first used by France‟s Valéry Giscard d‟Estaing to describe the USD‟s role in the

global financial system in the 1960s). This means a currency is widely accepted as a

store of value in itself because other countries use it to facilitate trade. China began

to accelerate its push for Renminbi internationalisation in 2010. Over time, we expect

the Renminbi to provide an attractive alternative to the USD, and share the gains of

becoming a reserve currency status itself.

Historically, the country with the world‟s main reserve currency was usually the largest

economy at the time. It has historically also usually been the largest exporter and net

creditor. China is already the world‟s largest trading nation and a major global creditor.

However, CNH assets may not match the depth and liquidity of the USD capital

markets for a long time. Costs and ease of transactions have historically been a major

determinant of reserve currency status. China is also an interesting case because it

still has capital controls in place, even as policy makers push for greater international

use of the Renminbi. Many would argue that full capital account convertibility is

needed before the Renminbi can be taken seriously as a reserve currency.

II. The mechanics

The Standard Chartered Renminbi Globalisation Index (RGI)

Our index aims to measure overall growth in offshore Renminbi „usage‟. We count

the currency‟s use as a store of wealth, a trade settlement currency and a means of

capital raising, as well as its FX market trading volume. These are all key parts of the

internationalisation story. The RGI also helps to identify inevitable setbacks on a

promising long-term uptrend.

A detailed explanation of the methodology behind the RGI can be found in the

Appendix. Here we summarise the key characteristics that help the index capture the

CNH market‟s variety and increasing geographical scope:

The RGI is computed on a monthly basis, based on four CNH market

components with weights inversely proportional to their variance – (1) CNH

deposits, (2) trade settlement and other international payments, (3) Dim Sum

bonds and certificates of deposit (CDs) issued, and (4) FX turnover, all from an

offshore perspective and denominated in Renminbi.

We have chosen these components to represent the major areas of offshore

Renminbi activity by corporates, and also taken into account the availability,

reliability and trackability of the data.

On the Ground


Both quantitative and qualitative thresholds are in place to determine an offshore

market‟s eligibility for index inclusion. This adds scalability to our index as the

CNH continues to extend its global reach.

Location-specific data for each component is used to compute a corresponding

global aggregate. The index initially covered only Hong Kong; Singapore and

London were added in August 2011. As other centres, such as Taipei or New

York, become more significant, we will add them to the index.

The Offshore Renminbi Corporate Survey

Complementing the RGI is the launch of our first Offshore Renminbi Corporate

Survey. It is conducted independently by Asset Benchmark Research and will be

conducted on a quarterly basis. The aim is not just to gauge the change in actual

offshore Renminbi usage over the past six months, but also to measure expectations

for the next six months. While the RGI tells us where things stand now, the survey

gives us a forward-looking view, with the more qualitative questions providing added

flavour and texture. Details on the factors that would motivate respondents to

increase their offshore Renminbi use are particularly interesting.

Corporates in various locations are asked whether they are (or plan to be) involved in

six main areas of offshore Renminbi activity:

Offshore Renminbi deposits

CNY trade settlement

CNH FX transactions

Dim Sum bond issuance

CNH loans

Portfolio investments in Renminbi

Top managers of companies in 16 locations were interviewed for our first survey,

conducted between mid-October and early November. Respondents comprise a mix

of multinationals and companies with a more local/regional focus. They are generally

chosen for the survey because they are likely offshore Renminbi users. Figures 2

and 3 show the breakdown of respondents, by location and by the number of

offshore Renminbi product types they use (current versus potential).

Figure 2: Respondent locations

% of respondents

Figure 3: A tendency to use more products

% of respondents

No. of additional products respondents may use in

6 months’ time

No. of CNH products currently using

0 1 2 3 4 5 6

0 23.66% 5.34% 1.53% 3.05% 3.05% 1.53% 0.76%

1 4.58% 5.34% 1.53% 0.76%

2 8.40% 5.34% 3.82% 0.76%

3 9.16% 4.58% 1.53% 1.53%

4 8.40% 2.29% 0.76%

5 1.53% 0.76%

6

* Including those in mainland China;

Sources: Asset Benchmark Research, Standard Chartered Research


51%

35%

14%

Hong Kong Rest of Asia * Europe

On the Ground


Both the Standard Chartered RGI and the survey will become an integral part of

The Renminbi Insider – our bi-monthly flagship report covering on- and offshore

Renminbi macro and market developments. The next survey will be conducted in

February 2013. We will continue to expand the number of respondents and

geographical locations covered by the survey.

III. The results

The RGI – Recovery in all areas but deposits Figure 1 on the front page shows the RGI going back to December 2010, at which

point a base of 100 was set. This is a natural starting point. In H2-2010 the Renminbi

was first being allowed to trade freely on a strictly offshore basis for non-trade-related

purposes (which led to different onshore and offshore pricing, or CNY and CNH), and

offshore Renminbi business was allowed to be developed freely as long as it does

not involve the flow of Renminbi back into mainland China (non-trade cross-border

Renminbi remittances are subject to quotas or case-by-case approval). The birth of

CNH trading incentivised corporates to switch to Renminbi trade settlement, which

boosted Renminbi deposits and, in turn, supported Dim Sum bond issuance.

It is therefore unsurprising to us that, in a little less than two years since December

2010, the RGI has grown more than seven times in size, and now stands at a reading

of 735. Below are more of our observations on the RGI:

The „pause‟ in the uptrend in Q4-2011 and Q1-2012 reflected the setback in the

CNH market then. This sell-off took place in September 2011, when the global

financial markets were still reeling from the escalating European sovereign debt

crisis. Growth expectations were scaled back on a global scale, led not only by

the US and Europe, but also by mainland China. The CNH and Dim Sum bonds,

which were among the last markets to succumb to risk aversion, sold off along

with the rest of the Asian FX and credit universe. This left many investors

shaken, and offshore Renminbi activity slowed markedly across all four of our

index components in the subsequent months.

While Renminbi deposits in Hong Kong have yet to return to pre-shock levels,

the recovery in the RGI has been impressive, driven by a swift rebound in all

three of the other index components. As of September 2012, the index was 46%

higher than its previous „peak‟ in Q4-2011. This is in line with our long-standing

view that, looking beyond the deposit accumulation story, there is plenty of

momentum behind further CNH market growth.

We believe the stalling of Renminbi deposit growth in Hong Kong year-to-date

has been driven by a combination of (1) more balanced import and export flows

denominated in Renminbi; (2) the absence of CNY appreciation expectations;

(3) the creation of new channels, such as R-QFII, to bring money back into

China; and (4) leakage to other emerging Renminbi financial centres. While the

days of exponential deposit growth in Hong Kong are likely to be difficult to

repeat (barring further major policy liberalisation), we believe Hong Kong

deposits are well supported by now-elevated CNH interest rates driven by bank

competition. The likely resumption of CNY appreciation in 2013 should also help.

More offshore users will also mean more accounts are opened.

The expansion of the CNH‟s geographical reach has also helped to boost the

RGI‟s performance over the past year. Both Singapore and London met the

https://research.standardchartered.com/configuration/ROW%20Documents/Up,_up_and_away__07_10_12_14_43.pdf

On the Ground


index entry requirements in August 2011, and have since been contributing to

headline RGI growth. They have so far been neck-and-neck in the race to

become the next big offshore Renminbi financial centre. As of September,

excluding Dim Sum bonds (which are global in nature and should not be

associated with a particular location), the ratio of the relative sizes of Hong

Kong, Singapore and London was 78:12:10.

Looking ahead, there are a few things to keep an eye out for:

Month-on-month growth in the RGI has slowed over the past several months, to

1.9% in September from 4.4% in August and 6.9% in July (Figure 4). This

moderation has been broad-based. This could be a result of the downward

adjustment in global growth expectations (led by China) in Q3-2012, and the

subsequent hit to global sentiment. Over time, as the nominal base grows larger,

double-digit month-on-month growth rates could be difficult to repeat. But for

now, our expectation is that the bottoming of China‟s economy and a gradual

recovery in 2013 will bring new impetus to the index.

Both London and Singapore are looking to shift up a gear in their race to outdo

each other. The second Hong Kong-London Forum, a private sector-led

co-operation initiative between the two cities aimed at jointly promoting CNH

business and developing CNH capabilities, will be held in London in early

December. Singapore, meanwhile, recently issued full banking licences to two

Chinese lenders, a move widely seen as paving the way for the establishment of

a Renminbi clearing bank soon.

Taiwan is set to have a CNY clearing bank before Singapore, possibly before

end-2012, after the signing of a Memorandum of Understanding by the central

banks on both sides of the Taiwan straits in late August. As outlined in our latest

Renminbi Insider report, we expect the extension of Renminbi business to

Taiwan‟s Domestic Banking Units (DBUs) from Offshore Banking Units (OBUs)

to lead to a surge in Renminbi activity in Taipei. For example, Renminbi deposits

in Taiwan are set to surge to CNY 150bn by end-2013, in our view, from CNY

18bn as of September 2012 (Figure 5). We project that Taipei will qualify for RGI

inclusion as early as H1-2013; when that happens, the pie will get bigger.

Figure 4: Not immune to the global slowdown

Change in RGI, % m/m

Figure 5: Taipei is next in line to join the RGI

Renminbi deposits in Taiwan OBU accounts, CNY bn

Source: Standard Chartered Research Sources: CBC, Standard Chartered Research

-5%

0%

5%

10%

15%

20%

25%

30%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

0

2

4

6

8

10

12

14

16

18

20

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

https://research.standardchartered.com/configuration/ROW%20Documents/Up,_up_and_away__07_10_12_14_43.pdf

On the Ground


The Renminbi offshore survey results

Our inaugural survey results confirm strong underlying growth momentum over the

past six months across the key CNH products (Figure 7). They also provide a

forward-looking view suggesting that the GRI is likely to remain on an uptrend in the

next six months (Figure 8). We summarise other key observations below.

76% of our respondents are either conducting business in at least one of the six

areas of offshore Renminbi activity we asked about, or may consider doing so

over the next six months (Figure 3).

Existing offshore Renminbi users are more willing to expand their usage, with

48% saying they may start to use one or more of the offshore Renminbi products

they are not currently using in the next six months. This contrasts with only 39%

for current non-users (Figure 3).

The most common offshore use of Renminbi is for FX transactions (by almost

half of our respondents, or 60% if one includes potential users), driven by

hedging needs (Figures 6 and 10).

For Renminbi trade settlement, potential users are mainly eyeing the benefits of

better FX risk management, while a higher share of existing users appreciate the

improvement in timeliness or are doing so at the request of onshore counterparts

(Figure 9).

According to the survey responses, the two main drivers of Dim Sum bond

issuance are the lower cost of funds and the expansion of financing channels;

more than half of the relevant respondents said they will use the proceeds to

make investments onshore (Figures 11 and 12).

The need to fund investment in, and finance trade with, China is set to drive

future growth in CNH loans (Figure 13).

We also had the opportunity to conduct one-on-one interviews with some of our

respondents. Below are key takeaways and quotes:

On the question “What qualities do you look for in a Renminbi offshore financial

centre?”, answers ranged included liquidity, stability, China‟s backing, genuine

currency need (as opposed to speculation), system efficiency, risk management,

infrastructure and network.

Figure 6: CNH FX is the most widely used product

Current and potential users (% of respondents)


33 36

48

22

8 10

17 18

12

17

11 10

0

10

20

30

40

50

60

70

Deposit Trade FX Loans Bond … Investment

Using now

May use in next 6 months

On the Ground


“I think the necessary quality for a Renminbi centre should include first of all a lot

of people actually holding sufficient deposits.”

– Company A (Hong Kong corporate).

“A lot of participation from the users will create a better market.”

–Company B (Hong Kong corporate).

Answers to the question “What are the key challenges to using RMB offshore?”

included pricing, currency fluctuation, scepticism towards the system,

operational procedures for settlement, limited usage of CNH offshore, and

cumbersome regulatory and administrative requirements.

“The key challenges are risk in currency exchange management and the

procedure for the settlement – operational procedure, whether it’s efficient, is

also very important to us.”

– Company C (Multinational corporate in Hong Kong and headquartered in

Japan)

“Not sure – this is something we are still just exploring.”

– Company D (multinational corporate in Singapore, headquartered in the US,

already using four of the six main Renminbi products)

We also asked a question specifically targeting multinationals: “Was it difficult to

convince your headquarters to do Renminbi business in [respondent‟s

location]?” None of the relevant respondents indicated any difficulty per se. One

(headquartered in mainland China) is already managing its FX out of Hong Kong

anyway, while another mentioned that a bit of persuasion was needed – see

below.

“We shouldn’t use the word difficult. We have to prove to them how viable and

feasible it could be to do RMB business. Because for our customers – they didn’t

have any special requests for us to trade in RMB currency.”

– Company C

On the Ground


IV. Future enhancements

Incorporating ‘ease of use’

We will continue to look for ways to improve the RGI index to make it even more

representative of the necessary conditions to become a reserve currency. The

forward-looking components of our survey provide useful insights into this. One

message from both the academic literature and market participants is that „ease of

use‟ is paramount in a reserve currency. It is difficult to see companies choosing to

use a currency in which it is more costly to transact. This is directly linked to the

breadth and depth of the market and to regulatory constraints. We will look for a way

to measure this in a sub-index that could be added to the RGI.

We will also build a benchmark against which to compare the RGI. The most logical

comparison would be to current reserve currencies; the GBP and USD are the best

examples. This is not immediately needed, however, given that the Renminbi is still

far from achieving reserve currency status on many of the key metrics.

About Asset Benchmark Research

Asset Benchmark Research conducts in-depth, product-specific surveys in Asia's

financial markets. Part of the group that publishes The Asset magazine, the research

team specialises in accessing senior corporate decision-makers and institutional

investors to provide accurate quantitative and qualitative data to assist in

management decisions.

On the Ground


Appendix: Standard Chartered RGI methodology

Index computation and components

Four parameters were chosen for the calculation of the Index, as they best represent

the major areas of offshore Renminbi activity by corporates. The weights of each

parameter (WD, WT, WS and WF) are inversely proportional to their variance. The

index level for each month, in respect of the immediately preceding month, is

computed in accordance with the following formula:

where (sources in brackets):

RGI(t) means, in respect of month t, the Index level as calculated, with a base of

100 as of December 2010;

DEPO(t) means, in respect of month t, the sum of the three-month moving

average of offshore Renminbi deposits outstanding across eligible markets (local

central banks, monetary authorities, or other credible official sources, using the

latest data available if not regularly reported);

TSIP(t) means, in respect of month t, the sum of the three-month moving

average of monthly Renminbi trade settlement and other Renminbi international

payments across eligible markets (SWIFT WATCH);

DSCD(t) means, in respect of month t, the three-month moving average of

outstanding issues of Dim Sum bonds and offshore Renminbi-denominated CDs

globally (Bloomberg); and

FXTO(t) means, in respect of month t, the sum of the three-month moving

average of monthly offshore Renminbi (CNH) FX trading turnover across eligible

markets (Standard Chartered‟s own estimates).

An eligible market refers to an offshore market that has met the three main eligibility

criteria for it to be included in the index. First, data on the market needs to be

available, reliable and trackable over time. Second, an eligible market, for the month

when it is first added to the index, must have offshore Renminbi flows equal to or

larger than the size of Hong Kong‟s as of the index base year. Third, the market

needs to be widely recognised as an offshore Renminbi centre, or have the potential

to become one.

On the Ground


Figure 7: Change in usage over the past six months

% of respondents

Figure 8: Expected change in usage in the next six months

% of respondents

Sources: Asset Benchmark Research, Standard Chartered Research Sources: Asset Benchmark Research, Standard Chartered Research

Increase Same Decrease

0% 20% 40% 60% 80% 100%

Deposit

Trade

FX

Increase Same Decrease

0% 20% 40% 60% 80% 100%

Deposit

Trade

FX

Figure 9: FX risk management drives RMB invoicing

Factors driving corporates’ use of RMB trade settlement

Figure 10: Hedging is the main purpose for FX use

Main purpose of CNH FX transactions (% of respondents)


Figure 11: Lower costs, diversification of financing tools

Motivations for considering RMB bond issuance

Figure 12: Investment in China is the main driver

Uses for funds raised via CNH bonds (% of respondents)


0%

20%

40%

60%

80%

100%

Current user Potential user

Others

Requested by China counterparts Improved timelines

Mandated by parent

improved access to China buyers / suppliers Better manage interest rate risk Cost savings

Improved trems of trade

Better manage FX risk

Potential users

Current users

0% 20% 40% 60% 80% 100%

Alpha-/yield-seeking

Other

Hedging

43.5% 43.5%

8.7%

4.3%

Expand financing channels

Lower cost of funds

Build international profile

Hedging

52%

25%

15%

4% 4%

Investment in China

Offshore working capital

Swap into other currency

Replace onshore WC

loans

Refinance RMB loan in China

On the Ground


Figure 13: China-related business is the main driver of loans

Main purpose of CNH loans (% of respondents)

Figure 14: Most respondents are positive on CNH loans

Actual change in amount, last 6M vs. expectations of next 6M


Current users

Potential users

0% 20% 40% 60%

Other

Swap into other currency

Financing trade with China

Investment in China

38.46% 30.77%

46.15%

46.15%

15.38% 23.08%

0%

20%

40%

60%

80%

100%

Loans actual change past 6mth Loans expected change next 6mth

Decrease Same Increase

On the Ground


Disclosures Appendix Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and

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South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. © Copyright 2012 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any way without the prior written permission of Standard Chartered Bank.

Document approved by

Marios Maratheftis Global Head of Regional Research

Data available as of

00:01 GMT 14 November 2012

Document is released at

00:01 GMT 14 November 2012

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