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Offshore RMB Market and
Shanghai-Hong Kong Stock Connect Updates
Ricky Li
Strategic Planner
Economics and Strategic Planning Department
Bank of China (Hong Kong) Limited
Oct 2015
2
A. Latest Updates of the Offshore RMB Market
B. Shanghai-Hong Kong Stock Connect
Content
3
RMB is getting more popular around the globe
BOC Offshore RMB index (ORI)
Source: BOC
China continues to accelerate regulatory reforms towards RMB internationalization
World Payments Currency Ranking & Market Share
Source: SWIFT
• As China’s fast-growing economy continues its integration with the outside world, it is a natural development
for RMB to become more widely used in trade and investment activities.
0.32%
0.33%
0.38%
0.42%
0.50%
0.59%
0.65%
0.75% 0.91%
1.07%
1.13%
1.19%
1.20%
1.27%
1.37%
2012Q2 2013Q2 2014Q2 2015Q2
4
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
As of Sep 2015, a total of
RMB411.5bn RQFII quota
has been granted to 141
institutions in 8 countries
A widening channel for offshore RMB funds to access China’s domestic bond and
stock markets
RQFII Quota Distribution
(RMB billion)
RQFII Quota Distribution
(RMB billion)
Source: People’s Bank of China, BOCHK
80
80
80
80
50
80
50
270 270 270
20
2011 2012 2013 2014
30 50 50
Jul 2015
80
80
80
80
50
270
Canada 50 50
Switzerland 50
30
Luxembourg Chile
50
50 Hungary 50
Qatar
Hong Kong
UK
Singapore
France
Korea
Germany
Australia
5
More RMB clearing banks were designated by PBoC 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; Easy acceptance
Singapore ICBC Singapore (May 2013) An established commodity & 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
Chile CCB Chile (May 2015) First RMB clearing bank in South America
Hungary BOC Hungary (Jun 2015) One of the largest trading partner of China in central/
eastern Europe
South Africa BOC Johannesburg (Jun 2015) First RMB clearing bank in Africa
Argentina ICBC Argentina (Sep 2015) China is the 2nd largest trading partner of Argentina
6
6
6.1
6.2
6.3
6.4
6.5
6.6
Central parity rate
CNH
CNY
Enhancement of RMB central parity rate fixing mechanism
An important step in forming the market-oriented mechanism of RMB exchange rate
• On August 11, 2015, the PBOC
revamped the central parity rate
fixing mechanism: “Before opening
of the interbank foreign exchange
market, the market makers provide
quotation to China Foreign Exchange
Trading System with reference to the
closing exchange rate on the previous
day, including considerations of
demand-supply conditions and
changes in exchange rates of major
currencies.”
Source: Bloomberg, BOCHK Research
The Trend of CNH, CNY and Central
Parity Rate Against USD
7
The spread between CNY and the central parity rate narrowed
After the change in the reference rate fixing mechanism, the spread between CNY and the central
parity rate nearly eliminated.
However, the spread between CNY and CNH increased significantly.
The volatilities of CNH were much larger than that of the CNY after change in the mechanism
After PBOC improved the CNY|USD central parity rate fixing mechanism, there has been
substantial changes in the spreads between CNY, CNH as well as the central parity rate
1106
1264
-200
0
200
400
600
800
1000
1200
1400
2/2/2015 2/3/2015 2/4/2015 2/5/2015 2/6/2015 2/7/2015 2/8/2015 2/9/2015
Spread between CNY & CNH Spread between CNY &Central parity rate
Source: Bloomberg, BOCHK Research
8
RMB may not keep up the pace with USD appreciation
Factors that may exert downward pressure on
the RMB exchange rate against the USD
– The weakening Chinese economy
– The flagging export sector
– In terms of the real effective exchange rate,
RMB appreciated 12% in the past one year
– The Fed’s rate hike may lead to a continued
strong USD
The chance of sharp depreciation is not high
– The PBOC may stabilize the FX market
– Although China’s economy is still weak, the
growth rate of GDP will not largely diverge
from the target of approximately 7%, which is
still higher than most countries.
Slim chance of sharp depreciation within this year, but downward pressure remains
100
105
110
115
120
125
130
135
Source: BIS
RMB real effective exchange rate
9
Relaxed restrictions for interbank bond market access
Widened investment scope for Offshore Institutional Investors in the Interbank
Bond Market, scale and frequency of investments are expected to increase
• Financing quota shall not
exceed the amount of
outstanding bond
• Funds obtained through the
repo transactions can be
transferred for use in offshore
• Greater flexibility in bond
investments onshore, which will
attract more offshore
institutions to invest RMB into
onshore interbank bond market
Jun 2015:
Clearing Banks and
Participating Banks Authorized
to Conduct Repo Transactions
in the Interbank Bond Market
• Pre-approvals are no longer
required to access the
interbank bond market
• Institutional investors can
decide their own amount of
investment
• Broader range of investments
to include bond repo, bond
lending, forward bond
agreements and other
derivative products
Policy Relaxation on Interbank
Bond Market Access for
Offshore Sovereign Institutions
Mainland
China’s Interbank
Bond Market
July 2015:
10
Currently, the RMB liquidity pool in
Hong Kong accounts for more than
40% of the entire offshore pool
In Q2, the RMB deposits increased
for three consecutive months as
RMB exchange rates became stable
The recent RMB exchange rate
fluctuation lead to the slight decline
in the Hong Kong RMB deposit
Substantial RMB liquidity pool supports the financing activities for global institutes
and corporate customers
Hong Kong RMB deposits dropped slightly
Hong Kong RMB Customer Deposits
(RMB billion) Aug 2015
979bn
Source: HKMA
0
200
400
600
800
1000
1200
01/10 01/11 01/12 01/13 01/14 01/15
11
Issuance of offshore RMB bond decelerates
In Q2 2015, the total issuance of
offshore RMB bond was
RMB41bn, jumped more than
200% QoQ.
However, the issuance volume
decelerated in Q3 as investors
worried that the RMB might further
depreciate.
The yield of the offshore RMB
bond in the secondary market
increased. To a certain extent, this
might affect the intention of issuing
RMB bond
127
91
64
37
120
51
81
52
88
113
90
230
4 7 21 15
234
88
271
114
173
126
432.86
175.5
129.25
67.5
234.59
139.5 123
32
55
20.5
57.9 51.92
193.5
161.5
57.2
12.5
0
50
100
150
200
250
300
350
400
450
07/12 01/13 07/13 01/14 07/14 01/15 07/15
The offshore RMB bond market developed rapidly in the past few years. Recently,
the issuance amount dropped due to investors’ concern on exchange rate
Source: BOCHK
12
RMB RTGS continueed to grow very rapidly
In the first half of this year, the
total RMB RTGS volume in Hong
Kong amounted to over
RMB100tn, YoY 30%.
The total RMB RTGS volume
was equivalent to 98% of the
sum of the RTGS volume in
HKD, USD and EUR.
Offshore transactions accounted
for nearly 90% of the RMB RTGS
volume, while about 10% was
cross-border transactions
0
5
10
15
20
25
01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14 01/15 07/15
The RMB clearing bank in HK provides reliable and efficient RMB clearing services
to financial institutions all over the world.
Aug 2015
21.8tn
Hong Kong RMB RTGS Volume (RMB trillion)
Source: HKICL
13
RMB’s growing reputation among central banks
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
Armenia, 1bn
Suriname, 1bn
South Africa, 30bn
Chile, 50bn
Many central banks around the world have signed bilateral currency swap
agreements with People’s Bank of China.
• Total Amount of the Bilateral Currency Swap Line is now more than RMB3.1tn
14
Inclusion of RMB in the SDR basket
According to PBoC, RMB is now the 7th largest reserve currency in
the world. More than 40 worldwide central banks or monetary
authorities have already added RMB into their reserve
The compositions of SDR will be reviewed at the end of 2015 and
the new currency basket will be effective from September 2016. We
believe that RMB is possible to be added in the SDR basket in the
coming review
According to IMF, a currency could be included in the SDR basket
when
1. the volume of merchandise and service export in the country is
one of largest in the world in the past 5 years, AND
2. it is a freely useable currency
USD, 41.9%
EUR, 37.4%
GBP, 11.3%
JPY, 9.4%
Current Composition of the SDR
After decade of monetary and currency reforms, RMB basically fulfills the criterion for
adding into the SDR basket
15
A. Latest Updates of the Offshore RMB Market
B. Shanghai-Hong Kong Stock Connect
Content
16
SH-HK Stock Connect Became A Key Investment Channel
Total turnover (As of Aug 2015)
– Northbound trade - 1.3 trillion
– Southbound trade - 0.53 trillion
The Stock Connect operated very smoothly, showing that the operational mechanism and risk
management measures were effective
760 1023 1536 786 1620
12372
5443 4357 4227 2427 1686
58797554 6193
55677817
10768
10463 1420211139
57484549
Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15
Northbound (NB) Southbound (SB)
Although there are some tapering off in recent weeks, the long term impact of SH-HK
Stock Connect in connecting China’s capital market to the world is significant
SB record of
HKD26.1bn
on 9Apr15
NB record of
HKD23.4bn
on 6Jul15
Source: HKEX, BOCHK Research
SH-HK Stock Connect Average Daily Trading Volume (HKD’m)
17
New policies allowed public
offer fund and social security
fund to buy HK stocks
through stock connect,
southbound trade was getting
more popular
After Jun, the volatilities of
the China’s stock market
increased significantly.
This caused impacts to
Northbound trade to have a
large amount in net-buy or
net-sell
Stock Connect Activities after debut last year
17
Daily net-buy amount in Northbound trade and Southbound trade (RMB 100M)
Northbound trade was more popular than
the southbound trade.
Northbound trade
Southbound
trade
Accumulated amount of Northbound
trade minus Southbound trade
18
Northbound trade was more popular
than Southbound trade
As of Aug 2015, the total turnover of
Northbound trade was 1.3 trillion, while
the total turnover of Southbound trade
was 0.53 trillion. Southbound trade was
once more active in Apr this year
Turnover increased gradually
In both markets, the turnover of stock
connect increased gradually. But still
the volume was quite small, compared
to the whole market. (Daily turnover %
of the whole market: Northbound
(about 0.6%) Southbound (about 1-3%)
Correlated with market indices
Highest Southbound Stock Connect
turnover: RMB227 billion (Jun)
Highest Northbound Stock Connect
turnover: HKD234 billion (Apr)
In the above period, both indices in HK
and SH stock market increased to a
very high level
Quota remained sufficient
Major characteristics of the Stock Connect
In general the overall quota in this
scheme remained sufficient, except
that the daily northbound quota was
once used up in Nov 2014 and the
southbound quota used up in Apr
2015.
19
Major implications of Stock Connect
Significance Implications
• Promote the development of the
Hong Kong offshore RMB market
• Explore new customer segments
• Introduce new investment
products
• Provide professional services
• Strengthen the collaboration of
the two markets
• Regulators and the market
participants develop closer
cooperation arrangement, which
will increase the demand for
talents in the financial industry
• In medium to long term, the
capabilities of both capital
markets will be greatly enhanced.
Promote the liberalization and reform of the China’s capital market
Consolidate the position of Hong Kong and Shanghai as financial centres
Support the development of RMB internationalization
20
Diversified Investment Channels
PBOC is liberalizing the capital account step-by-step to facilitate cross-border
investment flows and ensure sufficient risk controls are in place
2015 2014 2006 2011 2003 Going Forward
QFII Scheme
QDII Scheme
RQFII Scheme
Shanghai - Hong Kong
Stock Connect QDII2 Scheme
Shenzhen-Hong
Kong Stock Connect
Mutual Recognition
of Funds
• Ultimately, relaxing capital controls provide both domestic and overseas investors with new
investment channels to invest their RMB funds, open up new opportunities for financial-
services firms and help China’s transition to an economy driven more by consumption and
services
21
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