FX Strategy: A brief guide to CNH - Danske...

Investment Research

www.danskebank.com/CI

A brief guide to CNH - the offshore Chinese yuan

September 2015

Allan von Mehren Chief Analyst +45 45128055 [email protected] Bloomberg DRIM <GO> Important certifications and disclosures are contained from page 12 of this presentation.

2 www.danskebank.com/CI

• CNY is the ISO currency code for the Chinese currency. CNH is the currency

code used for Chinese currency on offshore accounts.

• The main offshore centre is Hong Kong but many new centres have opened

with big centres in London, Singapore and Frankfurt.

• Different regulation for offshore and onshore accounts has made it

necessary to have separate currency codes.

• CNY becomes CNH when it is transferred from onshore accounts to

offshore accounts in relation to a commercial payment.

• CNH is not a separate currency – the conversion rate between CNY and

CNH is 1 to 1 in connection with payments to and from China.

• However, if you want to convert the Chinese currency into another currency

there will be different exchange rates for CNH and CNY.

• Arbitrage between CNY and CNH is only possible when based on

commercial underlying trade flow – still capital controls on capital flows.

Facts about CNH


Understanding the offshore CNH

CNH Account

CNY Account

FX market CNH

FX market CNY

1 to 1 conversion

Not full arbitrage

CNH becomes CNY

CNY becomes CNH

Payments

Payments

OFFSHORE ONSHORE

Mainland China

Exchange rate differs

Capital controls


4

The onshore and offshore exchange rates - I

• CNY and CNH rates differ

− Driven by supply and demand on the separated onshore and offshore markets and depreciation/appreciation expectations.

− CNH tends to trade weaker than CNY when there are depreciation expectations in the market and vice versa.

− Arbitrage is only possible on the back of trade flows but controls on capital mean arbitrage opportunities are not perfect.

• Strong political commitment in China to

making the offshore market work

− Swap agreement between the Peoples Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA).

− HKMA provides liquidity on offshore market if needed.

Source: Bloomberg, Danske Bank Markets


• China aims for same CNH and CNY

rate

− The recent FX reform led to a widening of the spread due to rising depreciation expectations.

− China has intervened in offshore market to keep the spread tight.

− The PBoC uses so-called agency banks (big state-owned banks) to intervene in the offshore market.

− A narrow CNH-CNY spread is one of the requirements of the IMF in relation to China’s adoption in the SDR.

− China’s commitment to similar CNH and CNY

rate limits the basis risk in using the CNH

market for hedging CNY exposure.

The onshore and offshore exchange rates - II

‘Deviations between the offshore (CNH)

and onshore (CNY) RMB exchange rates

raise potential operational issues.’

IMF, Review of the Method of the Valuation of the SDR – Initial Considerations, 3 August 2015



China’s FX reform 11 August 2015

• The PBoC has changed the way the CNY reference rate is set on a daily basis. The reference rate is used to define the +/-2% trading band.

• Instead of being set by the PBoC, it is calculated on the back of reports from a range of banks that have to base their input on the CNY closing rate the previous day.

• The change happened on the back of China’s ambition to become part of the SDR in connection with the five-year review at the end of 2015. The IMF requires the reference rate to become more market-based for China to fulfil the conditions to become a member of the SDR.

• As the spot rate was 2% weaker than the reference rate on 11 August, the reference rate instantly weakened by 2%.

• The CNY is now a more market-based currency, but China is still managing the currency through intervention to keep it close to what they call ’the equilibrium rate’.

• China intervened with around USD100bn in August 2015 to halt further depreciation as the ’devaluation’ triggered strong capital outflows.

• The reform is raising uncertainty over the CNY outlook

and the CNY can no longer be viewed as a USD proxy.

‘A market-based “representative” RMB rate in terms of the

US dollar would be needed to value the RMB against the

SDR. The representative rate is currently the onshore fixing

rate, i.e. a central parity rate, announced daily by the CFETS

at 9:15 a.m. However, this rate is not based on actual

market trades, and can deviate by up to 2 percent from the

onshore market exchange rate. In the event of SDR

inclusion, the Fund, in consultation with the Chinese

authorities, would need to identify a market-based exchange

rate that could be used as a representative rate for the

RMB.’ IMF, Review of the Method of the Valuation of the SDR –

Initial Considerations, 3 August 2015



• Often better price conditions in sales contracts as China wishes to promote CNY settlement.

• More transparency in contract conditions.

• Increase potential supplier base, because settlement in CNY might be a precondition for some Chinese importers.

• Reduce transaction costs (cash pool, trade CNH/DKK directly).

Why invoice in CNY?

• Often better price conditions in contract.

• Increase potential customer base in China.

• Potential to reduce settlement time and reduce sales outstanding.

• Reduce transactions costs.

Exporter

Importer

Challenge: you need to manage CNY risk !

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Case 1: Export to China, invoice in CNY, settlement in CNH

Chinese buyer

Buyer’s local

bank

Corporate Danske Bank

Clearing bank Invoice in CNY. Forward your CNH account information.

Offshore

Onshore

Payment instruction to your offshore CNH account. Forwards invoice and supporting documents.

Payment to Danske Bank’s CNH offshore account

Danske Bank credits your CNH account (no documentation required) CNH can be converted into any other currency using the CNH exchange rate .

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2

3

4

No change in documentation requirement

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Chinese

exporter

Exporter’s

local bank

Corporate Danske Bank

Invoice in CNY Chinese exporters onshore account information.

Offshore

Onshore

Required to forward invoice and supporting documents within 5 days of notification. If not, the payment the returned.

Payment instruction to Chinese exporter’s domestic CNY possible using Business Online (no documentation required except invoice) number.

Onshore bank receives funds and holds them in a suspense account and notifies exporter.

Clearing bank

Case 2: Import from China, invoice in CNY, settlement in CNH

Buy CNH in the offshore FX market if you do not have sufficient balance in CNH account.

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2

3 4

5

Funds are released when documentation has been approved.

No change in documentation requirement


• CNY payments can be sent using Business Online and other electronic

platforms

− Invoice number is put in Details to the Beneficiary field.

− Settlement will be more efficient if you are able to provide CNAPS code (China National Advanced Payment System). Most bank branches in China have a unique 12-digit CNAPS code.

− CNAPS code is put in the Beneficiary Bank field after bank’s name and address and is CNAPS+ 12-digit code.

• Danske Bank is able to provide both CNH and CNY accounts

− Use of CNY account restricted and balance on account has to be used for commercial purpose within three months.

− You are now be able distinguish between possible balances on CNH and CNY accounts in your account statement from Danske Bank.

Practical information


• Trade in good and services (usual documentation required)

• Dividend payments (usual documentation required)

• Foreign direct investments, capital injections and intercompany loans (case-by-case approval and documentation required)

• Can not be used for paying for a domestic subsidiaries purchases from a domestic Chinese supplier (not a cross-border payment)

• Can not be used for payments between individuals (not a business-to business payment)

How can a CNH account be used ?

• CNH (unlike CNY) is fully convertible in the sense that it can always be converted into any other currency (no documentation required)

• No restrictions on use of CNH as long as it does not involve cross border payments with China

Legal cross-border payments to and from China in CNY


Disclosure

This presentation has been prepared by Danske Research, a division of Danske Bank A/S (‘Danske Bank’).

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