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RMB InternationalizationRMB InternationalizationFor French Chamber of Commerce and Industry in Hong KongFor French Chamber of Commerce and Industry in Hong Kong
December 1December 1stst, 2010, 2010
Eddie Ching
Chief Operating Officer, Financial Institutions Group, Asia Pacific
1. Offshore RMB - Overview
2. China and RMB
3. RMB Trade Settlement
4. RMB Opportunities
5. Offshore RMB Market
6. Offshore RMB – Other Considerations
7. HSBC RMB Product Capability & Experience
Page 3
Page 4
Page 9
Page 15
Page 19
Page 33
Page 36
Agenda
3
Offshore RMB - Overview
No change to onshore RMB within mainland China
Recent development centers around offshore RMB sinc e July 2009
Objective is to facilitate interaction and transact ion between Chinese enterprises and foreign companies
Primarily focused on import/export trade, extending into FDI and ODI i.e. real economy activities
Since July 2010, foreign companies are allowed to purchase, borrow and transfer offshore RMB freely outside China , creating a more active and liquid FX, MM and investment market
5
1.3 Billion people [1]
2nd Largest Economy [2]
1st Largest Exporter
USD 1.2 Trillion [1]
Source: [1] China Popin, http://www.cpirc.org.cn/en/eindex.htm[2] http://www.bloomberg.com/news/2010-08-16/china-economy-passes-japan-s-in-second-quarter-capping-three-decade-rise.html
China
6
14.3
5.1 4.93.4
2.7
0
2
4
6
8
10
12
14
16
US Japan China Germany France
Source: [1] International Monetary Fund / CIA – The World’s Factbook / Businessweek.com[2] http://www.bloomberg.com/news/2010-08-16/china-economy-passes-japan-s-in-second-quarter-capping-three-decade-rise.html
1.21.1
1.0
0.5
0.0
0.2
0.4
0.6
0.8
1.0
1.2
China Germany US Japan
(Trn USD)
GDP 2009 [1]
Total Export 2009 [1]
(Trn USD)
China surpassed Japan as the world’s2nd largest economy in 2Q 2010 [2]
China – Second largest economy and largest exporting country
7
Source: CIA – World Factbook 2010
Gross Domestic Product (GDP) of China grows by 11.1% y-o-y in 1H 2010
China – GDP Growth Rate
8
USD
EUR
RMB
GBP JPY
0
500
1000
1500
2000
2500
3000
2007 BIS Data
Daily Avg Turnover (USD Bn)
EURRMB
GBP JPY
0
500
1000
1500
2000
2500
3000
2007 BIS Data (if RMB fully convertible)
Daily Avg Turnover (USD Bn)
Note: Estimate of RMB daily average FX turnover is based on a turnover-to-trade ratio of 0.3, which is lower than 0.32 for EUR, 0.4 for YEN and 0.46 for GBP. The rise in use of RMB will offset the use of USD, EUR, YEN, and GBP at a share of 40%, 30%, 20% and 10%.
Source: HSBC estimate
Could become the 3rd highest turnover currency in t he world if RMB is fully convertible
RMB
10
Total value of Mainland China’s import and export w as US$2,207 billion in 2009
Source: China Customs
1430.7
USD bn 2008
Of which:
US 252.4
Total 1201.7
2009
Hong Kong 190.7
Japan 116.1
Korea 73.9
Germany 59.2
Netherland 45.9
UK 36.1
Singapore 32.3
India 31.6
France 23.3
EXPORT by Mainland China
1,133.1
USD bn 2008
Of which:
Japan 150.7
Total 1,005.6
2009
Korea 112.1
Taiwan 103.3
US
Germany 55.8
Australia 37.4
Malaysia 32.1
Brazil 29.7
Thailand 25.6
Russia 23.8
IMPORT by Mainland China
Canada 21.8 UK 9.6
220.8
166.2
97.9
53.7
49.9
36.7
31.3
30.1
29.7
21.5
17.7
130.9
102.6
85.7
55.8
39.4
32.3
28.3
24.9
21.3
7.9
81.4 77.4
China International Trade
11
Geographical coverage:
� Since June 2010, RMB Trade Settlement Scheme has be en expanded to 20 cities and provinces across China, and to all overseas cou nterparty countries and regions, covering 95% of China’s import/export trad e volume
Chinese enterprises eligible to conduct trades in R MB:
� All entities in approved cities and provinces can p ay out RMB (import)
� Mainland Designated Enterprises (MDEs) can receive RMB (export)
� Latest 67,300 as at 30 November 2010
Transaction eligibility:
� Banks and authorities in China will conduct transac tion validation. No validation needed overseas
� Retail flows into China not allowed
RMB Cross Border Trade Settlement
12
Corporates
(all companies including Banks and Non-Bank
Financial Institutions)
Individuals
Within the 20 provinces and cities:
Beijing (北京), Tianjin (天津), Inner Mongolia (内蒙古), Liaoning (辽宁), Shanghai (上海), Jiangsu (江苏), Zhejiang (浙江), Fujian (福建), Shandong (山东), Hubei (湖北), Guangdong (广东), Guangxi (广西), Hainan (海南), Chongqing (重庆), Sichuan (四川),Yunnan (云南), Jilin (吉林), Heilongjiang (黑龙江), Xizang (西藏) Xinjiang (新疆)
Goods trade flow
Service trade and other current account transactions flow
RMB Funds flow
* Provided that the overseas banks RMB platform is ready
• Deposit-taking • Currency Conversion• Remittance• Interbank transfer via RTGS, Cheques, Notes• Lending• Investment Products
All Other Countries
(Exporter)Mainland Designated
Enterprises (MDE)
(Importer)
All Enterprises
RMB Cross Border Trade Settlement
13
Notes: (1) HSBC in-house estimates(2) HSBC Trade Confidence Index
2010 | 2011 | 2015| 2020|
• 56% of exporters and importers in HK expect tosettle trade transactions in RMB by 2011 (2)
• 17 major markets in Asia-Pacific expect to increase RMB trade activity by 2011 (2)
More than half of China’s total trade flows with emerging markets will be settled in RMB by
2015 (1)
Hong Kong's RMB trade settlement volume will reachRMB2.2trn by 2020 . This is the same size as Hong
Kong's total trade in all currencies today (1)
RMB Trade Settlement – Market Potential
14
Source: http://www.info.gov.hk/hkma/eng/statistics/msb/attach/T030302.xls (Figures from HKMA)
RMB Trade Settlement Volume – from HKMA and public media release
Hong Kong’s RMB business started as early as 2003
Total RMB deposit amounted to RMB150bn as of Sep 20 10, and RMB217bn as of Oct 2010
2.2m RMB demand and savings accounts opened as of O ct 2010
Hong Kong RMB trade settlement volume surpassed RMB 135bn; monthly volume around RMB68.6bn, as of Oct 2010
Offshore RMB – Experience in Hong Kong
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Jul-09 Aug-09Sep-09Oct-09 Nov-09Dec-09Jan-10Feb-10Mar -10 Apr-10May-10Jun-10 Jul-10 Aug-10Sep-10Oct-1030,000
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000RMB Trade Settlement Vol RMB Market Deposits
16
Offshore RMB – Opportunities for Corporates
Open RMB account
Purchase RMB FX or conduct RMB FX Forward/Swap/Opti on/IRS
Trade and settle goods and services trade with ente rprises in China or overseas in RMB, be it under Documentary Credit or Open Acco unt
Invest in RMB instruments including deposits, struc tured products, bonds, and even shares
Borrow or raise RMB funding through bank borrowing, trade finance and bond issuance, and soon equities
Asset – Liabilities and currency risk management
17
Offshore RMB – Opportunities for Banks and Broker De alers
Account and payment services
Trade and trade financing for corporate
CNH FX sales and trading
CNH bond sales and trading
Balance sheet management via CNY bond investment (i n Hong Kong and/or China)
Debt capital raising – issuance of CNH bond in Hong Kong
CNH bond custodian services
18
Offshore RMB – Opportunities for Insurances and Fund Managers
Insurance Companies
• CNH insurance policy
• CNH unit link products
• CNH bond investment
• CNH FX trading and hedging
Traditional / Alternative Funds
• CNH investment funds, institutional or retail
• CNH FX trading and hedging
• CNH bond trading
� CNY – onshore currency used and traded in mainland China
� NDF CNY – offshore non-deliverable forward rate available to corporate and
institution internationally
� CNH Trade – offshore deliverable forward rate provided by the RMB Clearing
Bank in Hong Kong referencing onshore CNY rate for corporate engaged in
cross border China import/export trade settlement
� CNH General – offshore deliverable forward rate openly traded an d available to
corporate and institution internationally
Type of RMB
20
21
RMB Funding and Investment
• Source of Fund:
• FX with HSBC China or HSBC Hong Kong
• Borrowing from HSBC China or HSBC Hong Kong
• RMB balances can be invested in:
• Interest bearing accounts (in China)
• Overnight deposits
• Term deposits
• RMB Bonds
• Investment funds and structured products (in Hong K ong)
22
RMB Funding Options – HSBC China – For Banks
• FX Trades:
• RMB spot with HSBC China
• Forwards not available to offshore counterparty
• After hours trades possible via email, with SWIFT c onfirmation on next business day
• Subject to the quota assigns to HSBC China by PBOC
• Borrowing:
• Can borrow RMB from HSBC China
• Limited up to 1 month in tenor by regulations
• Subject to the quota assigned to HSBC China by PBOC
• RMB balances can be converted back to other currenc ies
23
RMB Funding Options - HSBC Hong Kong – For All
• FX Trades:
• RMB spot with HSBC Hong Kong
• Forwards, Options and Swap available
• During RMB Spot Market Trading hours deals can be b ooked through Reuters or directly with our HSBC FX Desk
• No regulatory quota but subject to availability in interbank market
• Borrowing:
• Can borrow RMB from HSBC Hong Kong
• No limit in tenor or size but subject to liquidity conditions in market
• RMB balances can be converted back to other currenc ies
24
RMB Money Market in Hong Kong
• Money market rate for RMB obtained from Trade purposes and another for General purposes
• Money market rate for General purpose is around 50- 75bps lower than that of Trade purposes
• A good indication of the rates can be found on HSBC ’s Reuters page “ HSBCRMB”
• Free transfer of RMB funds across different account s
- Any payment, for goods/service, investment products , or even salary can be effected in RMB
- Banks become more active in managing RMB funding. I nterbank wholesale money market liquidity gradually develops to cope w ith funding demands. The offshore RMB interest rate should evolve to become more market-based
Source: HKMA, Bloomberg, HSBC
25
RMB FX in Hong Kong
• Two tier market now exists, Participating Banks in Hong Kong quote 2 types of RMB exchange rate as follow:
- Exchange rate for Trade purposes
- Exchange rate for General purposes
HK Spot market
- Daily volume of USD300–400m, and growing weekly
- Transaction size of USD1–10m
HK Forwards
- Daily volume of USD250m, average ticket size USD2-3 m, Bid-Offer Spread
narrows to 50bps
- Tenor of upto 2 years is actively traded in the mar ket
- Offshore USD/RMB Forward is quoted at premium and o nshore Forward is at
discount
26
RMB Bond Market in Hong Kong - Snapshot
First and only offshore RMB bond market
First issue launched in 2007 by China Development B ank
In 2009, foreign banks’ China incorporated entities can also issue RMB bonds in HK
First Sovereign Bond issued in 2009
First Offshore RMB CD issued by Citic Bank Internat ional in Jul 2010
First Offshore RMB bond issued by Hopewell in Jul 2 010
First Multinational Corporation Offshore RMB bond i ssued by McDonald’s in Aug 2010
47 RMB bonds/CD issued in Hong Kong so far
A total of RMB/CD 75bn has been issued
Outstanding RMB bonds/CD amounts to RMB 57bn
HSBC is engaged with 32 out of 42 RMB Bond/CD issue s in Hong Kong since 2007
27
RMB Bond Market in Hong Kong - Outstanding
The offshore RMB bond market started in 2007
with China Development Bank as the first issuer.
In 2007-2008, the market was dominated by
Chinese banks as they were the only entities
allowed to issue offshore RMB bonds
In 2009, HSBC (China) became the first foreign
bank to issue offshore RMB bonds and the Ministry of Finance completed RMB6bn
debut issuance in Oct 2009
In 2010, the offshore RMB bond market
developed rapidly on the back of PBOC and
HKMA’s supplement regarding expansion of
offshore RMB businesses
Source: Bloomberg, HSBC
HSBC-led deals in red
Pricing Issuer Rating Am ount Coupon Matur ityDate Issuer Moody's S&P (RMB m n) (%) Date
25-Nov-10 The Export - Import Bank of China Aa3 A+ 1,000 1.950 2-Dec-1222-Nov-10 Ministry of Finance of China Aa3 A+ 1,000 2.480 1-Dec-2022-Nov-10 Ministry of Finance of China Aa3 A+ 2,000 1.800 1-Dec-1522-Nov-10 Ministry of Finance of China Aa3 A+ 2,000 1.000 1-Dec-1322-Nov-10 Ministry of Finance of China Aa3 A+ 3,000 TBA 2YR24-Nov-10 Caterpillar Financial A2 A 1,000 2.000 1-Dec-1215-Nov-10 The Export - Import Bank of China Aa3 A+ 4,000 2.650 2-Dec-1315-Nov-10 China Merchants Holding HK - - 700 2.900 19-Nov-139-Nov-10 China Resources Pow er - - 1,000 2.900 12-Nov-139-Nov-10 China Resources Pow er - - 1,000 3.750 12-Nov-1522-Oct-10 Sinotruk - - 2,700 2.950 22-Oct-1218-Oct-10 Asian Development Bank Aaa AAA 1,200 2.850 21-Oct-2015-Oct-10 China Development Bank - - 3,000 2.700 11-Nov-1311-Oct-10 China Development Bank - - 2,000 3mSHIBOR+10bps 14-Oct-138-Oct-10 ICBC (Asia) - - 117 2.300 22-Oct-128-Oct-10 ICBC (Asia) - - 47 2.650 22-Dec-13
17-Sep-10 Deutsche Bank - - 200 2.000 28-Sep-1216-Sep-10 Bank of Tokyo-Mitsubishi - - 20 1.980 26-Sep-1116-Sep-10 ICBC (Asia) - - 1,000 2.250 24-Sep-1216-Sep-10 ICBC (Asia) - - 1,000 2.250 24-Sep-127-Sep-10 Bank of China - A- 2,200 2.650 30-Sep-127-Sep-10 Bank of China - A- 2,800 2.900 30-Sep-132-Sep-10 China Development Bank - - 500 2.100 13-Sep-122-Sep-10 China Development Bank - - 1,000 2.100 13-Sep-121-Sep-10 China Development Bank - - 100 1.950 12-Sep-11
19-Aug-10 McDonald's Corporation A3 A 200 3.000 16-Sep-1310-Aug-10 HSBC - - 114.45 2.000 17-Feb-11
7-Jul-10 Hopew ell Highw ay Inf rastructure - - 1,380 2.980 13-Jul-126-Jul-10 Citic Bank International - - 500 2.680 20-Jul-11
28-Sep-09 Ministry of Finance of China A1 A+ 3,000 2.250 27-Oct-1128-Sep-09 Ministry of Finance of China A1 A+ 2,500 2.700 27-Oct-1228-Sep-09 Ministry of Finance of China A1 A+ 500 3.300 27-Oct-147-Sep-09 HSBC Bank (China) A1 / Prime-1 - 2,000 2.600 14-Sep-11
14-Aug-09 China Development Bank A1 A+ 2,000 2.450 20-Aug-1110-Aug-09 China Development Bank A1 A+ 1,000 3mSHIBOR+30bps 20-Aug-1129-Jun-09 Bank of East Asia (China) - A- 4,000 2.800 23-Jul-1125-Jun-09 HSBC Bank (China) A1 / Prime-1 - 1,000 3mSHIBOR+38bps 13-Jul-11
28
RMB Bond Market in Hong Kong - Growing
In the year 2010 YTD, we saw 29 new RMB
Bond/CD issuance in offshore RMB Market,
which is more than the total number of
issuances from 2007-2009.
Moreover, more than half of the volume is
contributed by offshore issuer so far.
Recently, Export and Import Bank of China
announced the decision to issue no larger than
5bn RMB bond in Hong Kong. We are expecting there is still more room
to grow for the Offshore RMB Market in 2010.
In sum, the Offshore RMB market is growing
rapidly.
Source: Bloomberg, HSBC
Offshore RMB Bonds/CD Issuance
0
5
10
15
20
25
2007 2008 2009 2010 YTD0
5
10
15
20
25
30
Issue Amt by Offshore EntityIssue Amt by Onshore Entity# of Issues
RMB (Bn) # Of Issues
29
RMB Bond Market in Hong Kong - Yield
The graph shows the yield differentiation
between Onshore and Offshore market. The
Onshore curve is mainly determined by PBoC
policy on deposit and lending rates, whereas
the Offshore curve is mainly affected by the 0.865% call rate set by
the Clearing Bank as compare with 2.50%
Onshore 1Yr Deposit Rate.
Source: Bloomberg, HSBC
Indicative Yield for Onshore and Offshore RMB Bonds
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1 2 3 4 5 6 7 8 9 10Tenor (year)
Onshore Government Bond (MOF) Onshore Policy Bond Offshore Government Bond (MOF) HopewellMcDonald's CorporationBank of ChinaChina Development BankICBC AsiaAsia Development BankDeutsche BankChina Resouces PowerUBSSinotrukChina Merchants Holding HK
Yield (%)
30
RMB Bond Market in Hong Kong - Upcoming
• Internationalization of RMB Bond Market
• Extension of yield curve
� Issuance since 2007 mainly focus in short term bond s (2 to 3 years)
� Expect yield curve extension with bond funds and in surance demand (5 to 10 years)
• Wider spectrum of credit
� Currently issuances mainly dominated by sovereign o r local & Chinese banks
� China corporates’ borrowing onshore basically guided by PBOC lending rate
� Issuing in offshore market represent a cost saving opportunity for them
� Chinese enterprises usually unrated
• Widening of onshore / offshore funding gap encourag es more issuance offshore
• RMB becomes a Euroclearable currency since Nov 29, 2010 and a bridge currency
with Clearstream after Feb 2011
31
� The People’s Bank of China (PBOC) promulgated the N otice on Pilot Scheme for Renminbi Clearing Bank and Other Eligible Instituti ons outside the Mainland to invest in the Mainland’s Interbank Bond Market (the Pilot Scheme) on 18 August 2010.
HSBC China is the first and only foreign bank appro ved as cleariHSBC China is the first and only foreign bank appro ved as cleari ng agent in ng agent in China and can provide oneChina and can provide one --stop services for clientsstop services for clients ’’ trading, clearing and trading, clearing and
custody in China interbank bond marketcustody in China interbank bond market
� Eligible Investors
� Foreign central banks or monetary authorities
� Offshore RMB trade settlement banks
� Source of Fund: RMB fund generated from central bank currency coope ration, cross-border trading or RMB investment business.
� Investment Scope: Currently foreign investors can engage in governmen t bonds, PBOC bill, financial bond, commercial paper, and mid-term note s but repurchase transactions, derivatives/structured products and leveraged tradi ng are not allowed.
� Quota Control: The net remitted-in capital cannot exceed the inves tment quota approved by the PBOC at any point of time.
RMB Bond Market in China – Dealing and Custody Servi ces
32
RMB Bond Market in China - Application Process
1. Apply for investment quota approval from PBOC
2. Open a bond account with China Government Securities Depository Trust & Clearing Co. Ltd (CDC) and file with PBOC Shanghai
3. Apply to PBOC Shanghai for opening a special RMB cash settlement account
4. Open a securities account and a special RMB cash settlement account with HSBC
5. Apply for trading with interbank trading centre (CFETS)
PBOCPBOC
Starts Trading
HSBCHSBCPBOC SHHPBOC SHH
CDCCDC
CFETSCFETS
PBOC SHHPBOC SHH
34
Offshore RMB – Up and Coming
More commercial transactions denominated in RMB in Asia, including FDI and ODI
Offshore RMB FX trading is being developed, primari ly in Hong Kong and expanding
Offshore RMB balance will grow
�Current interest rate differential and expected RMB appreciation
�Chinese importers are encouraged to settle in RMB
�Growing number and type of RMB denominated savings and investment products to enhance yield – investment funds and insurance po licies already introduced since July 2010 in Hong Kong
�Expected improvement in offshore RMB deposit yields as offshore/onshore money market emerges
Offshore RMB markets will have increasing interacti on with onshore counterparts, as restrictions are expected to be lifted over time. C orporate who has access to both China and offshore markets are expected to arbitrag e
35
Offshore RMB – What is missing
Movement of RMB crossing China border must be suppo rted by an underlying commercial transactions, between two companies
RMB capital account movement, e.g. capital injectio n or shareholder’s loan into China, requires one more PBOC approval on top of us ual regulatory approval
Specifically for Hong Kong Only
No RMB lending to individuals
Personal RMB conversion remains at CNY20,000 per da y
37
11stst foreign bank to settle cross-border RMB Trade in Hong Kong
11stst foreign bank to settle cross-border RMB Trade in all ASEAN countries with HSBC presence
11stst foreign bank to settle cross-border RMB Trade in all six continents
11stst foreign bank to offer RMB current account and cheque services in Hong Kong
11stst foreign bank granted RMB corresponding banking license in China
11stst to issue RMB Certificate of Deposits in Hong Kong
11stst to issue RMB Bonds in Hong Kong
11stst to execute RMB Interest Rate Swap in Hong Kong
11stst to launch RMB Structured Deposit in Hong Kong
11stst and OnlyOnly foreign bank to provide interbank RMB bond clearing/custody services in China
11stst and OnlyOnly foreign bank as market maker of RMB-Ringgit direct quotation in China
No.1No.1 Bond House for Offshore RMB and HKD issuances
HSBC’s RMB Experience
38
Offshore RMB Products (Hong Kong) Onshore RMB Products (China)
Payments and Cash Management
• No Restriction on Account Opening • No Restriction on Account Opening
Custody • RMB Custody and Funds Administration Services • RMB Custody and Clearing
Exchange Services and Risk Management Products
• Spot FX (for trade / general purposes)
• Deliverable FX Forward
• Deliverable FX Option
• Deliverable FX Swap
• Deliverable Interest Rate Swap
• Non Deliverable Forward
• Spot FX
Borrowing / Financing Products
• Trade financing facilities and commercial loans
• Issuance of offshore RMB bonds/CDs
• Money Market
• Trade financing facilities and commercial loans
• Money Market
Investment Products
• Time deposit, certificate of deposit
• Primary and secondary RMB bonds trading
• FX linked structured deposit
• Interest rate linked structured deposit
• Equity linked structured deposit
• Gold linked structured deposit
• RMB investment funds
• Time deposit
• Call deposit
• Interbank bond trading (for banks only)
HSBC – your bank of choice in international RMB busi ness
HSBC - First International Bank to settle cross border trade in RMB July 2009
Structured and traded FX neutral collateralised USD loan in HK
April 2010
Structured and traded FX linked RMB Structured Deposit in HK
July 2010
Structured and traded equity linked RMB structured deposit in HK
July 2010
Structured and traded Libor linked RMB structured deposit in HK
Aug 2010
One of the pioneer banks to sell large size general purpose RMB FX to corporate customerJuly 2010
First bank to execute RMB Interest Rate Swap
Oct 2010
HSBC’s RMB Capability
39
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This document is issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC). The information contained herein is derived from sources we believe to be reliable, but
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