Offshore RMB Market Update

Ricky Li

Economics and Strategic Planning Department

Bank of China (Hong Kong) Limited

November 2014

2

Offshore RMB Market Update

A. Offshore RMB Bond Market Update

B. RMB Internationalization Process

3

The primary issuances of offshore RMB bond reached a record high this year

Rapid growth in offshore RMB bond market

Source: BOCHK, Bloomberg

From 2007 to 2014, the total issue size of dim sum bonds has exceeded RMB560 billion.

Tenor - 2 and 3 year remain the most common for offshore RMB bonds, demand for 5 year or above is growing for

investment grade credits. Bonds maturing in 2014 amounted to around RMB82 billion

10 12 16

35

105 112

104

172

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 2013 2014(Sep)

2.50%

1.50%

0.25%

0.13%

2.12%

0.31%

23.82%

51.09%

15.67%

2.60%

0% 10% 20% 30% 40% 50% 60%

<2yr

2yr

3yr

5yr

7yr

9yr

10yr

15yr

20yr

30yr

•Note: Include all issuances from 2007 to 2013.

•Source: BOCHK

Offshore RMB Bond Primary Issuances Tenor Distribution

4

Driven by the increasing interests from both issuers and investors, many other

international financial centers are keen get involved in offshore RMB business.

Offshore RMB Bond Market Expanding Globally

In 2012: London – First RMB bond was issued by HSBC

In 2013: RMB clearing bank was established in Taiwan and Singapore.

– Taiwan “Formosa Bond” was first issued by China Trust Bank.

– Singapore “Lion City Bond”: Issuance by HSBC, SCB and BOC Singapore Branch

In 2014: Offshore RMB bond has expanded to more ex-Hong Kong offshore markets

– Frankfurt: by KFW Bankengruppe

– Sydney: by BOC Sydney branch

– Luxembourg – by BOC Luxembourg Branch

– Paris – by BOC Paris Branch

About 11 non-Hong Kong offshore regions have issued offshore RMB bonds, the value of issuance

totaling RMB 146.1 billion.

Since 2014, London market has adjusted its strategy by underwriting sovereign bonds to promote

market development.

5

Sovereign and quasi-sovereign RMB bond issuances account for about 30% of the

entire offshore RMB bond issuances

Increasing sovereign bond issuances

China Government Bond:

– China’s Ministry of Finance has issued RMB bonds in

Hong Kong for the seven consecutive years. As an

offshore RMB bonds issuance platform, Hong Kong is

also recognized as the Chinese offshore sovereign bond

market

– The value of issuance has increased from only RMB 6

billion in 2009 to 28 billion in 2014

Mainland China policy banks:

– In 2014 Q1-Q3, China Development Bank, Export-Import Bank and the Agricultural Development Bank have

issued bonds valued at RMB 17.5 billion in Hong Kong. The total issuance is valued at RMB 63 billion during

2007-2014.

International agencies and foreign local governments:

– Asian Development Bank, World Bank, KfW of Germany and the Province of British Columbia, Canada.

Foreign governments

– The issuance of RMB bonds by British government makes the sovereign bond issuance structure more

perfect. The issuance amount was RMB 3bn (Tenor: 3 year; Coupon rate: 2.7%).

6

Substantial RMB liquidity pool supports the financing activities for global institutes

and corporate customers through bond issuances

Growing offshore RMB pools generates more demand

(RMB bn) HK Taiwan Singapore Macau Korea London Paris Luxembourg

Record date 2014.09 2014.09 2014.06 2014.7 2014.7 2013.12 2013.12 2013.12

RMB deposit* 945 300 254 124 99 5.5 20 2.4

YTD +9.8% +64.5% +30.3% +44.3% N/A +7.6% N/A N/A

*The RMB deposits are customer deposits (excluding interbank deposit)

0

100

200

300

400

500

600

700

800

900

1000

J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S

2008 2009 2010 2011 2012 2013 2014

Sep2014

944.5bn

Currently, the RMB liquidity pool in

Hong Kong accounts for more than

half of the entire offshore pool

Other financial centres are emerging

in RMB business, investors in the

respective regions show more interest

in the RMB-denominated investment

product

Increasing demands on investment in

offshore RMB bonds

Source: HKMA

Hong Kong RMB Customer Deposits

(RMB billion)

7

Investor profile becomes more diversified

At the early stage, the issuance of RMB bond market in Hong Kong was mainly targeting investors

from Hong Kong and the rest of Asia.

As more and more EU/US organizations get involved in bond issuance, the investors’ origins

become more diversified.

– British Columbia in Canada: Mainly targeting North American investors

– UK Government: Asian investors account for 57%, and the EU investors account for 43%.

– IFC: US and non-Asian investors account for 54%. 31% from central banks around the world.

Source: BOCI – Overall investor profile of all the offshore RMB bonds issued since 1 Jan 2010 to 28 Mar 2014

Investors of offshore RMB bonds breakdown 2010-2014

8

Although the offshore RMB bond market has been progressing encouragingly, it still has

a long way to grow

Market size is still small

– US international bonds (offshore bonds): USD 3 trillion

– UK international bonds (offshore bonds): USD 2.9 trillion

– Offshore RMB bond: USD 70 billion

Secondary market is not active

– According to SWIFT, turnover in value of offshore RMB bond in September 2014 is

USD 84 billion (daily average is less than USD 3 billion), ranked No. 19 among all

currencies.

– In the same month, the Euro and the US dollar bond trading reached USD 54 trillion

and 22 trillion respectively (daily average turnover of USD 2.5 trillion and USD 1

trillion).

Offshore RMB bond market will take time to mature

The overall depth and sophistication is still in a very primitive state compared with

other developed bond markets

Source: BIS (June 2014)

9

In 2014, Total issuance amount will be probably more than RMB 200billion (>80% YoY

growth)

There will be more sovereign bond issuance in the Hong Kong market in the next few

years

The successful issuance of RMB sovereign bonds from the World Bank and the British

government will play a showcase effect.

More new investors like central bank, sovereign fund, insurance company, asset

managers are pouring into this market to find relative value.

Outlook of the offshore RMB bond market

The market will continue to grow and mature

10

Offshore RMB Market Update

A. Offshore RMB Bond Market Update

B. RMB Internationalization Process

11

From the perspective of Currency Functions

RMB has been making a significant progress in the three basic currency functions,

including payment, investment and reserve.

1. Payment – Medium of exchange

RMB has been widely accepted around the world

2. Investment – Unit of account

As a getting more popular investment tool, RMB investment is

expanding rapidly.

3. Reserve – Store of value

RMB is rising to the status of being an alternative reserve

currency for central banks.

Currency Functions

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The Growing Cross-border RMB Trade Settlement

According to SWIFT, RMB ranked

no.7 as worldwide payment

currency

In first 3 quarter, the volume of

cross-border RMB trade settlement

was 4.82 trillion, a YoY growth of

53%

Cross-border RMB trade settlement

has reached 220 countries /regions

or 98% countries /regions around

the globe

The majority of cross-border RMB trade settlement was settled via banks in Hong

Kong.

Source: People’s Bank of China

1. Payment – Medium of exchange

Currency Functions

3.6 506

2081 2935

4630 4820

2009 2010 2011 2012 2013 2014.1-9

RMB Cross-border merchandise trade settlement

World payments currency ranking & market share

(RMB billion),

13

RMB RTGS volume reached a record high

0.55

2.69

4.56

6.56

11.33

14.11

0

2

4

6

8

10

12

14

16

01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14

The financial infrastructure in Hong Kong plays an essential role in facilitating RMB

cross-border and offshore transactions

The RMB clearing bank in HK provides

reliable and efficient RMB clearing

services to financial institutions all over

the world.

As of Oct 2014, there are 225 banks

participating in the RMB clearing

platform in HK (76 of which are from

other overseas regions).

The clearing network covers around 30

countries in six continents.

Recently, Hong Kong’s RMB Clearing

Bank has further extended the service

hours to the world longest 20.5 hours

per day, to better cater the growing

business needs in Europe and America. Source: Hong Kong Interbank Clearing Ltd

Hong Kong RMB RTGS Volume

(RMB trillion)

Oct 2014: 14 trillion Jan-Oct 2014: 136 trillion

1. Payment – Medium of exchange

Currency Functions

14

Lifted channels for investment in RMB denominated products

Allow designated institutions (including overseas central banks, RMB clearing banks

participating banks) to invest into China’s Inter-bank bond market using RMB,

Use of RMB in ODI and FDI. In the first 3 quarters in 2014, cross-border direct

investment in RMB recorded at RMB 720.8 billion, an YoY growth of 117%, much faster

than the growth rate of cross-border RMB trade, that is 53%.

With the development of RMB as a payment currency, there are increasing demands

of investing in RMB.

2. Investment – Unit of account

Currency Functions

Chinese government introduced different policies under capital account to facilitate

the RMB funds flowing into and out of the Mainland China in an orderly and

controlled manner.

15

Lifted channels for investment in RMB denominated products

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 end-Oct 2014, the total

amount quota granted to individual

institutions was RMB 294 billion

(Hong Kong: 270B; UK: 9.6B;

Singapore: 8.8B; France: 6B)

Foreign investors are gaining more access to China’s capital market. RQFII is well

received in the market

2. Investment – Unit of account

Currency Functions

80

80

80

80

50

80

50

270 270 270

20

2011 2012 2013 2014

Qatar 30

RQFII Quota Distribution

(RMB billion)

Hong Kong

UK

Singapore

France

Korea

Germany

Canada 50

Australia 50

RQFII Quota Distribution

(RMB billion)

Source: People’s Bank of China, BOCHK

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RMB Qualified Domestic Institutional Investor (RQDII)

In Nov 2014, PBoC issued a circular to

allow Qualified investors in the mainland

China to use RMB in overseas investment

Broaden the channels of two-way flow of

funds in RMB

RMB internationalization process will be

further accelerated.

Mainland

China

RMB

Overseas

Investment in

RMB products

The new announced policy can further promote RMB going global

2. Investment – Unit of account

Currency Functions

17

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

and settle 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

• HKMA introduces additional measures to enhance RMB

liquidly in Hong Kong

• Reinforce Hong Kong’s role as the premier offshore

RMB center

Enhanced cooperation with Shanghai

Expanded investment channels available for

offshore RMB funds

Increased transaction volume in RMB related

businesses, e.g. currency exchange

China opens door to its stock market through Hong Kong

Source: Hong Kong Stock Exchange

Illustration of orderly flow of funds

2. Investment – Unit of account

Currency Functions

18

Lifting RMB conversion limit – Removing obstacles in product innovation

Removal of RMB 20000 conversion limit for Hong Kong residents

– Under the new arrangement, banks will square their positions arising from RMB conversions

conducted with Hong Kong residents in the offshore market instead of the onshore market.

Benefits:

– Provide convenience to trade Shanghai A-shares through the Stock Connect

– Facilitate the development of more diversified RMB products and

– RMB investment opportunities can be captured more easily

– Promote the use of RMB in wealth management.

Removal of limit is instrumental to the further growth of the Hong Kong offshore RMB centre.

Increase flexibility in RMB investment leads to more demands to use RMB in

wealth management and retirement

2. Investment – Unit of account

Currency Functions

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3. Reserve – Store of Value

RMB’s growing reputation among central banks

Bilateral currency swap agreements: with 28 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

Currency Functions

3. Reserve – Store of value

Canada, 200bn

20

RMB becomes an alternative reserve currency for central banks

It is reported that at least 50 countries or regions’ central banks have added RMB into their reserve

portfolio already made investment in RMB assets.

Among them, 29 central banks or monetary authority announced that they have bought RMB bond

or RMB assets with total amount of RMB140 billion (USD 20billion).

Australia: Allocated 3% of its foreign exchange reserves to RMB.

UK: Issued the first non-Chinese offshore sovereign RMB bond to raise RMB fund for its reserve

Currency Functions

3. Reserve – Store of value

Some central banks and sovereign wealth funds are diversifying their currency

holdings into RMB

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HK has huge advantages in RMB business amid competitions

Benefits to HK amid rapid growth of offshore RMB business in other overseas regions

– The offshore RMB pool and business volume will be further expanded, and thus the pie of overall

RMB business will be enlarged.

– Competitions facilitate these offshore RMB centers to optimize their services and create more

diversified innovative RMB products, supporting the overall growth of the offshore RMB business.

Strengths of HK comparing to other offshore RMB markets

– First-mover advantage, has become the largest offshore RMB center in terms of scale, depth and

breadth

– Robust and efficient financial infrastructure.

– More advanced in every business line, playing a vital role in the overall development process

– Rich and excellent talent pool, consisting of not only local professionals (in banking, accounting &

legal fields), but also many cross-border talents and management people with good knowledge

and network domestically and internationally.

In future, Hong Kong can act as a hub to link all offshore RMB centers in different regions

together and continue to be the testing field

New offshore RMB centers are emerging, and each has its own niche and strength.

Nevertheless, HK will continue to be the most significant offshore RMB market

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Thank you!

23

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25

RMB liquidity facility provided by HKMA

The provision of RMB liquidity facility is crucial in assisting banks in Hong Kong to manage

the increasing RMB payment volume

Tomorrow/1-Week

(1-week funds

available next day)

Tomorrow/Next

(1-day funds

available next day)

Overnight

(1-day funds

available

same day)

Intraday

Tenor One week One day One day Intraday

Interest rate

By reference to prevailing market

interest rates

TMA overnight

CNH HIBOR

fixing plus 50 bps

TMA overnight

CNH HIBOR

fixing as of 11:00

am

Eligible

collateral

• Exchange Fund Bills and Notes (EFBN)

• HKSAR Government bonds (HKGB)

• RMB denominated bonds issued in Hong Kong by the Ministry of Finance of the

People’s Republic of China (CMOF)

• RMB denominated bonds issued in Hong Kong by policy banks of the People’s

Republic of China, including Agricultural Development Bank of China, China

Development Bank, and Export and Import Bank of China

• Starting from 10 Nov 2014, banks may initiate a repo transaction with the HKMA to obtain intraday RMB funds.

The HKMA will charge a fee, based on the actual time of usage, with reference to the prevailing overnight

interest rate.

26

CNH Primary Liquidity Providers (PLPs)

The PLPs help make the CNH products in Hong Kong more liquid and make more use of

Hong Kong to support their CNH business worldwide.

With effect from 27 October 2014, seven banks have been designated by HKMA as

Primary Liquidity Providers (PLPs) for offshore RMB market in Hong Kong

The seven banks include BOC (Hong Kong), HSBC, SCB (Hong Kong), BNP Paribas,

ICBC (Asia), CCB (Asia), Citibank N.A.

These banks have pledged to expand their market-making activities in Hong Kong for

various CNH instruments, and use the Hong Kong platform in promoting their global

offshore RMB business.

In return, the HKMA provides a dedicated repo facility of RMB2 billion to each of the PLPs

so as to facilitate more efficient liquidity management when they carry out more market-

making and other business activities in the CNH market

The seven PLPs were selected through a competitive process among the 16 contributing

banks for CNH HIBOR fixing, which are all active participants in the CNH market.