Growing your offshore RMB business
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Transcript of Growing your offshore RMB business
Growing Your Offshore RMB Business
Celine Tam
Analyst
Economics and Strategic Planning Department
Bank of China (Hong Kong) Limited
April 2015
2
A. RMB the Next International Currency?
B. Policy Initiatives and Offshore Market Development
C. Implications of Offshore RMB Business to Indonesian Firms
Growing Your Offshore RMB Business
3
CNY vs. CNH?
Requirements for exchange conducted through “Trade Conversion Service”(CNY):
Trade in physical goods
Counterparty of trade transaction must be a Mainland China enterprise
Conversion date and amount should coincide with the proceeds/payment of the trade
settlement
CNH
RMB FX pricing in the offshore market
with overseas banks, which depend on
their own RMB open positions
Exchange rate is floating freely and
impacted by market supply and demand
of RMB
CNY
Onshore FX quotation with the China
Foreign Exchange Trade System
Exchange rate fluctuates around the
central parity rate with daily limits (2%
currently), and is relevant to China’s
national currency policy
CNH, the offshore RMB, is a freely convertible currency
4
World’s second largest economy
World’s largest trading nation
Ranking of RMB
Payment - 7th
Trade finance - 2nd
FX Trading - 6th
China continues to accelerate regulatory reforms towards RMB internationalization
RMB Internationalization Gathers Pace
0.25% Source: SWIFT
Jan 2012 Feb 2015 44.04%
USD
EUR
GBP
JPY
HKD
CNY
9.00%
2.48%
0.95%
29.73%
#1
#2
#3
#4
#10
#20
1.81%
43.09%
EUR
USD
GBP
JPY
CNY
8.57%
2.75%
28.95%
#1
#2 #3
#4
#5
#7
World Payments Currency Ranking & Market Share
1.85% CHF
1.82% CAD #6
5
RMB’s Growing Reputation among Central Banks
Bilateral currency swap agreements: with 31 central banks, amounted to more than RMB 3,100 billion
The swap agreements serve as a backstop RMB liquidity facilities in those countries or regions
Many central banks around the world have signed bilateral currency swap
agreements with People’s Bank of China
UAE, 35bn
Korea, 360bn
Pakistan, 10bn
Iceland, 3.5bn
Belarus, 20bn
Hong Kong,
400bn
Thailand, 70bn
Malaysia, 180bn
Indonesia,
100bn Singapore,
300bn
Mongolia, 10bn Kazakhstan,
7bn
Uzbekistan, 0.7bn
Turkey,
10bn
Australia, 200bn
Argentina, 70bn
Brazil, 190bn
UK, 200bn
Ukraine, 15bn
New Zealand,
25bn
Hungary, 10bn Albania
, 2bn
ECB, 350bn
Source: PBoC, BOCHK
Switzerland, 150bn
Qatar, 35bn
Russia, 150bn
Sri Lanka,
10bn
Canada, 200bn
Currency swap amount
(RMB trillion)
Source: Wind, BOC
Armenia, 1bn
Suriname, 1bn
South Africa, 30bn
6
Countries /Regions
RMB Clearing Banks appointed by PBoC
Key Competencies
Hong Kong BOC Hong Kong (Dec 2003) First-mover advantage / largest liquidity pool
Efficient financial infrastructure
Macau BOC Macau (Sep 2004) Proximity to China
Taiwan BOC Taipei (Feb 2013) Trade surplus and easy acceptance
Singapore ICBC Singapore (May 2013) An established commodity and FX trading center
UK CCB London (Jun 2014) Traditional FX trading center, Europe financial center
Germany BOC Frankfurt (Jun 2014) Strong trade relationship
France BOC Paris (Jun 2014) Breakthrough to Africa
South Korea BOCOM Seoul (Jul 2014) Close economic and political tie
Luxembourg ICBC Luxembourg (Sep 2014) Largest fund centre in Europe
Qatar ICBC Doha (Nov 2014) First RMB clearing bank in Middle East
Canada ICBC Canada (Nov 2014) First RMB clearing bank in North America
Australia BOC Sydney (Nov 2014) Growing trade and financial linkages with China
Malaysia BOC Malaysia (Jan 2015) Strong trade relationship
Thailand ICBC Thailand (Jan 2015) 3rd largest ASEAN trading partner of China
More RMB Clearing Banks were Designated by PBoC
New offshore RMB centers are emerging, and each has its own niche and strength
7
A. RMB the Next International Currency?
B. Policy Initiatives and Offshore Market Development
C. Implications of Offshore RMB Business to Indonesian Firms
Growing Your Offshore RMB Business
8
2007 2004 2009 2011 onwards
Phase 1: Retail RMB banking service
Feb 2004 – Introduction of RMB business, including deposit-taking, remittance, currency conversion & bank card business
Phase 2: Offshore RMB bonds market
2007 – Issuance of RMB bonds in HK (“Dim Sum Bond”) by Mainland financial institutions
Phase 3: Cross-border RMB trade settlement
2009 – Implementation of Pilot scheme of cross-border RMB Trade Settlement
Phase 4: Promoting use of RMB in investment
Capital account is gradually liberalized
Bank of China (Hong Kong) was
appointed as the RMB Clearing
Bank in Hong Kong in 2003,
which marked the start of the
Hong Kong offshore RMB
market
Major Milestones of the Offshore RMB Market
Offshore RMB business scope has been expanding in an orderly manner
9
1. RMB FDI and ODI
Foreign Direct Investment settled in RMB 862 billion (2014)
Overseas Direct Investment Settled in RMB 187 billion (2014)
Mainland
China RMB
Major Policies Development
Capital
China encourages the use of RMB in cross-border trade and investment
Source: PBoC, HKMA, BOCHK Research
Trade RMB Cross-border trade settlement
Trade has been fully open since Jun 2012
24% of cross-border merchandise trade settled in RMB
(2014)
2. RMB Bond Markets
Onshore: Central banks, RMB CBs and PBs can invest
in Mainland’s inter-bank bond market
Offshore: RMB 587 billion outstanding (End 2014)
3. RMB Qualified Foreign Institutional Investor
RMB 820 billion of investment quota (Jan 2015)
4. Pilot Zones Shanghai Free Trade Zone,
Qianhai Special Economic Zone,
New Free Trade Zones in Guangdong, Tianjin & Fujian
5. Shanghai-Hong Kong Stock Connect Scheme
RMB 550 billion of investment quota (Mar 2015)
10
The Growing Cross-border RMB Trade Settlement
In 2014, the volume of cross-
border RMB trade settlement
was RMB 6.6 trillion, an YoY
growth of 57%
About 24% of China’s cross-
border trades were settled in
RMB in 2014
Cross-border RMB trade
settlement has reached more
than 220 countries /regions or
98% countries /regions around
the globe Source: PBoC
Cross-border RMB trade settlement
(RMB billion)
3.6 506
2081
2940
4630
6550
2009 2010 2011 2012 2013 2014
RMB becoming a popular trade settlement currency
11
Rapid Expansion of the Offshore RMB Bond Market
Since the first RMB bond in HK in 2007,
the offshore RMB bond market has
developed rapidly
The most important backbone to develop
RMB bond market in Hong Kong is the
support from China’s central government,
especially the Ministry of Finance, state
policy banks and some other major
financial institutions
RMB sovereign bonds and quasi-
sovereign bonds together accounted for
more than 30% of total offshore RMB
bond issuance in 2014
Source: BOCHK, Bloomberg
Offshore RMB Bond Primary Issuances
(RMB billion)
10 12 16
35
105 112
104
202
2007 2008 2009 2010 2011 2012 2013 2014(Sep)
Depth and width of the offshore RMB bond market continue to develop substantially
12
Extension of RQFII Quota to Multiple Key Financial Markets
A licensed RQFII may raise
RMB funds offshore and invest
directly into securities markets
in China through an approved
investment quota
Starting from 2013, the RMB
Qualified Foreign Institutional
Investors (RQFII) scheme was
expanded to other regions
As of Jan 2015, the total
RQFII quota granted has
increased to RMB 820bn
RQFII Quota Distribution
(RMB billion)
RQFII Quota Distribution
(RMB billion)
Source: PBoC, BOCHK
80
80
80
80
50
80
50
270 270 270
20
2011 2012 2013 2014
30 50 50
March 2015
80
80
80
80
50
270
Qatar
Hong Kong
UK
Singapore
France
Korea
Germany
Canada 50
Australia 50
Switzerland 50
30
A widening channel for offshore RMB funds to access China’s domestic bond and
stock markets
13
“Gradual relaxation on the first line with efficient control mechanisms at the back”
Promote financial reform from four aspects:
1. Cross-border use of RMB, 2. Capital account convertibility,
3. Interest rate liberalization, 4. Foreign exchange management
Innovative arrangement in cross-border use of RMB:
Cross-border two-way RMB cash pooling: Corporates in FTZ can set up special RMB
deposit accounts for handing intra-group two-way cross-border RMB cash pooling
Cross-border RMB loan: Allowing non-bank FIs and corporates in FTZ to borrow RMB
fund from the offshore market, subject to “Macro Prudential Policy Parameter” or quota
management framework
Accelerating Capital Account Liberalization in Test Zones
Recently introduced policies aiming to promote financial market liberalization will
have considerable influence on promoting offshore RMB centre development
New Free Trade Zones announced for Tianjin, Fujian and Guangdong (includes
Qianhai Special Economic Zone)
• Shanghai Free Trade Zone
14
Stock Connect: Connecting Opportunities from All Over the World
• The Shanghai-Hong Kong Stock Connect - A
mutual market access program, through which
investors in Hong Kong/Overseas and
Mainland China can trade shares listed on
the other market respectively via the
exchange and clearing house in their local
market under a quota scheme
• A significant development for RMB capital
account liberalization
• It is expected that “Shenzhen-Hong Kong
Connect” and “Mutual Recognition for
Investment Fund” between Hong Kong and the
Mainland will be introduced in the future
Source: Hong Kong Stock Exchange
Illustration of Orderly Flow of
Funds
Total quota: 300 bn
Daily quota: 13bn
Total quota: 250 bn
Daily quota: 10.5bn
Expanded investment channels for offshore RMB funds
15
Outlook of RMB Internationalization
Global use of RMB gathers pace
Apart from the strong position in Asia-pacific countries,
western developed countries have also gained momentum
to participate in RMB community
Capital account liberalization will be the next policy focus
Foreign investors are gaining more access to China’s
capital market
On track to be a global reserve currency:
• Potential Inclusion of RMB in the IMF’s Special Drawing Rights
(SDR) Currency Basket by end-2015
• RMB is now in transition from a trading currency to an
investment currency; the international reserve currency status
will establish eventually
16
A. RMB the Next International Currency?
B. Policy Initiatives and Offshore Market Development
C. Implications of Offshore RMB Business to Indonesian Firms
Growing Your Offshore RMB Business
17
Growing Use of RMB Internationally for Trade
RMB now accounts for nearly 10% of traditional trade finance flows in terms of value
Source: SWIFT
RMB as World Currency in Value for Documentary Credit Letters of Credit and Collections: Inbound + Outbound Traffic, based in value
RMB’s activity share for
Documentary Credits
increased in value from
7.32% in Jan 2013 to
9.43% in Jan2015
Majority of RMB
transactions driven by
offshore centres such as
Hong Kong, Singapore,
Macau, and Taiwan
18
Surge in RMB Payments in the International Markets
According to SWIFT, 50 of the 161 countries with exchanged payments with China and
Hong Kong are now seeing 10% or more of the flows denominated in RMB
Indonesia’s RMB usage in payments rose 175% since Apr2013
Indonesia, one of the countries contributing to RMB’s growth
Countries % Growth
Since Apr 2013
Germany +151%
Canada +346%
Sweden +1050%
Indonesia +175%
Australia +61%
Malaysia +48%
International Payments Flows Sent and Received with China
and Hong Kong
< 10% > 10%
Note: Countries with RMB Usage
>10% recently
19
Economic Relationship between Indonesia and China
Trade relations between Indonesia and China lays a solid foundation for further
development of RMB business in Indonesia
China is Indonesia’s largest import and fifth largest export market
Indonesia is the fourth largest trading partner of China within the ASEAN countries
The trade surplus will help Indonesia build up a sizable RMB liquidity pool
The economic integration between the two countries intensified in the past decade
Bilateral trade between Indonesia and China
(Million USD)
(2000)
(1000)
0
1000
2000
3000
4000
20
00-0
1
20
00-0
9
20
01-0
5
20
02-0
1
20
02-0
9
20
03-0
5
20
04-0
1
20
04-0
9
20
05-0
5
20
06-0
1
20
06-0
9
20
07-0
5
20
08-0
1
20
08-0
9
20
09-0
5
20
10-0
1
20
10-0
9
20
11-0
5
20
12-0
1
20
12-0
9
20
13-0
5
20
14-0
1
Tradesurplus
Export2013 Trade Surplus:
US$ 5469 million
Source: MOFCOM, CEIC, BOC Research
China’s “One Belt, One Road” Strategy
Source: Barclays Research Jakarta
20
Implications of Offshore RMB Business to Indonesian Firms
Indonesian firms set to benefit from the use of RMB in settlements
For an Indonesian company that exports to China
Conducting trade settlements in RMB means receiving payments in a stable currency with lower
volatility and opportunities for diversified investments in RMB assets
For an Indonesian company that imports from China
Making payments in RMB may increase its bargaining power and negotiate for better pricing
terms
For companies with strong trade relationships in China and with revenue and
expenses in RMB
Using RMB in trade settlements create a natural hedge to currency risk with the benefits of
avoiding conversion costs
For multi-national companies with investment in China
Using RMB as settling currency will facilitate smooth implementation of their projects and
eliminate foreign exchange exposure
21
Hong Kong – Offshore Clearing Centre to Facilitate Worldwide RMB Payments
China
via RTGS via RTGS
Hong Kong
PB (D) PB (E) PB (F)
via RTGS via RTGS
Overseas Regions
PB (A) PB (B) PB (C)
via RTGS via RTGS
China National Advanced
Payment System
via
CNAPS
Offshore Market Onshore Market
CNAPS =
PB = Participating Bank
Simple but efficient RMB clearing model
BOCHK
(RMB Clearing Bank)
RTGS = Real Time Gross Settlement
22
Case Study: RMB Trade Settlement Process
• Indonesian companies can make RMB payments to or receive RMB payments from their
trade counterparties in Mainland China through a participating bank (BOC Jakarta Branch)
• RMB can be purchased or RMB credit can be obtained from local banks that provide RMB
services, when necessary
• The RMB proceeds can be deposited with a local bank, invested in a wide range of RMB
financial products or converted into other currencies
Indonesian
Company
Participating Bank
(BOC Jakarta Branch) Banks in China
A company
in China Import goods from China
RMB Exchange
Via RMB RTGS Via CNAPS
Real-time clearing
Export goods to China
Receive payments
in RMB
Receive payments
in RMB RMB Remittance
23
The Established Offshore RMB Market
Offshore circulation of RMB funds takes initiative
Development of cross-
border RMB trade
settlement and investment
Enlarged offshore RMB
liquidity pool
Diversified RMB-based
products and further
development of RMB asset
management
Sufficient funds to support
RMB financing activities,
e.g. loans, bonds
RMB Internationalization
Accelerates
24
RMB Solutions and World-Class Excellence
Global Presence
The most internationalized bank
in China
More than 600 overseas entities
in 40 countries or regions
Established RMB Clearing Network
7 RMB clearing banks designated
by PBoC
More than 1000 RMB clearing
accounts, covering 80+ countries in
5 continents
Initiatives and Innovations
Launched first cross-border
RMB trade settlement deal, first
share dividend remittance from
mainland to HK, first RMB FDI,
etc
Underwrote first offshore RMB
corporate bond and first RMB
IPO
Diversified RMB Products
RMB deposits and Loans
RMB trade settlement and finance
RMB exchange and remittance
RMB bonds and IPOs
RMB derivative products
And more…
Sound Trade Finance Business
Awarded ”Best Trade Finance
Bank in China” by various
organizations for years
Full range of trade settlement
products and services
Comprehensive Understanding
Dedicated professional team
Affluent customer base in China
and overseas
Effective communication with
regulatory authorities
25
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