Offshore RMB Express€¦ · 29.4 trillion in March 2020, up by 25.7% MoM. As of March 31, total...

Offshore RMBExpress

Issue 74 ‧April 2020

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

7

1

Editors：

Lynn ZhangTel ：+852 2826 6586Email : [email protected]

Sharon TsangTel ：+852 2826 6763Email: [email protected]

Matthew LeungTel：+ 852 3982 7177 Email: [email protected]

14

Market Review

Offshore RMB Express 1

I. RMB showed resilience underfinancial market turbulence

Coronavirus outbreak continued across the

globe. Massive slowdown in economic

activities led to a slump in financial markets.

The US Dollar Index (DXY) moved higher to

103, which is a multi-year high. Assets

including equities, corporate bonds, and gold

experienced sell-offs as investors switched to

risk-off mode and converted assets into USD,

pressuring the RMB exchange rate. CNH

remained weak and fell to 7.16 on March 19,

before stabilizing at 7.10 at end of March, but

was relatively stable compare to other assets.

As of March 31, the RMB’s central parity rate

against the USD closed at 7.0825, down

1.3% MoM, CNH closed at 7.0917, down

1.7% MoM, CNY closed at 7.0851, down

1.5% MoM.

The situation may further deteriorate as the

virus in Europe and the US is yet untamed.

The International Monetary Fund (IMF)

predicted a downturn in global economy,

indicating a growing chance of economic

recession. DXY is expected to remain strong

in short term, pressuring other currencies.

Although the external business environment

is becoming more uncertain, RMB showed

resilience under volatility. The degree of

depreciation was lower than Europe and

emerging markets currencies. The virus is

apparently under control in China and

economic activities could resume in Q2. Also,

Fed announcement of unlimited QE and

widened US-China interest rate spread

increased attractiveness of China bonds.

Therefore, CNH is expected to fluctuate

between 7 and 7.1 in the short to medium

Offshore RMB Market Stabilized amidst Financial Market TurbulenceCoronavirus fears remained in March and led to financial market turbulence. Risk-offconditions sent the dollar index to a multi-year high. CNH was depreciated to 7.16 inmid-March, before stabilizing at around 7.10 level. Offshore RMB major businessindicators rebounded after Chinese New Year, while the volume of cross borderpayments and settlements recorded double digit percentage points increase. BondConnect operated in a robust manner. Fed announcement of unlimited QE widened US-China interest rate spread and increased the attractiveness of RMB assets, promptingforeign institutions to increase Chinese bond holdings. RMB share of global currencyreserves was 1.96% as of Q4 2019, while the share of USD continued to decrease.

Market Review

Offshore RMB Express2

term. More news of positive developments

will increase the chance of a rebound in the

RMB exchange rate.

CNH Hibor was stable in March. As of March

31, the O/N, 1-week and 3-month CNH

HIBOR rates were 1.012%, 1.594% and

2.471%, respectively.

II. Offshore RMB major businessindicators rebounded

RMB business indicators rebounded after the

fall due to seasonal factors in February. By

the end of February, RMB deposits in Hong

Kong amounted to RMB638.7 billion, up by

4.3% MoM and up by 5.0% YoY. RMB loans

outstanding in Hong Kong were RMB159.6

billion, down by 0.9% MoM and up by 49.2%

YoY. The total remittance of RMB cross-

border trade settlements was RMB481.0

billion in February, up by 18.9% MoM and up

by 42.1% YoY. RTGS turnover was RMB

29.4 trillion in March 2020, up by 25.7% MoM.

As of March 31, total issuance of dim sum

bonds amounted to RMB43.0 billion

(including RMB40 billion central bank bills).

According to SWIFT, the RMB is the fifth

most active currency in February 2020 for

domestic and international payments by

value, with a share of 2.11%, behind USD,

EUR, GBP and JPY. RMB payments value

increased by 17.6% compared to the

previous month, while in general all

payments currencies decreased by 8.1%.

III. Foreign institutions continued toincrease China bond holdings; BondConnect maintained stable operation

The trend of foreign institutions increasing

holdings of Chinese bonds has not been

reversed by the effects of the virus. By end of

February, foreign holdings in Chinese bonds

reached RMB2.28 trillion, with a monthly net

inflow of RMB75.6 billion, with an increase of

RMB525.4 billion in total compared to

February 2019 (30% YoY). With the Fed re-

activating QE, US 10Y treasury yield

dropped from 1.9175% at end of 2019 to

0.677% March 31 2020 (quarter low at

0.5403%). The widening spread of US-China

interest rates, and further market opening-up

policies would facilitate investors increasing

holdings of China bonds.

Despite the severity of current situation,

Bond Connect has been operating in a robust

manner in March with continuous support

from offshore investors and onshore dealers.

Trading tickets totaled 5007 for the month,

while trading volume and average daily

turnover reached RMB478.2 billion and

RMB21.7 billion respectively. Policy bank

bonds, Chinese government bonds, and

Market Review


NCDs drew the most interest, accounting for

50%, 30% and 16% of the monthly trading

volume. In March, the scheme welcomed 89

new investors and expanded its coverage to

31 jurisdictions across the globe with 1,818

global institutional investors, including 70 of

the top 100 global asset management

companies.

IV. RMB accounted for 1.96% ofglobal currency reserves as of Q42019

According to the latest statistics released by

IMF on March 31, as of Q4 2019, reserves

held in RMB was US 217.67 billion, down by

USD1.95 billion since Q3 2019. RMB share

of global currency reserves was 1.96%,

slightly lower than 2.01% as of Q3 2019.

USD’s share of global reserves continued to

fall, down from 73% in 2011 to 60.9% in Q4

2019. Euro remained second with a share of

20.5%. JPY’s share increased to 5.7%, the

highest level since Q1 2001.

Policy and Peers Updates


NDB Finances Emergency Loan to China with Panda Bond

On April 2nd, New Development Bank (NDB), a multilateral development bank established

by the five BRICS countries, raised Rmb5 bn (USD705 mn) from a Panda bond public

offering to help fund a Rmb7 bn emergency assistance program loan to the Chinese

provinces of Hubei, Guangdong and Henan, which will help finance increased expenditures

on public health. NDB’s deal was the first coronavirus-themed Panda bond from a

multilateral financial institution, although other multilateral institutions such as African

Development Bank and Inter-American Development Bank have recently issued

coronavirus-themed US dollar bonds. The offering attracted strong demand from both

onshore and offshore investors. Total subscriptions stood at 2.99 times the issue size.

Bond Connect scheme advanced to offer services of special settlement cycles and

recycling settlement to streamline the access of China interbank market and to cater for

trading and settlement needs of offshore investors.

Special settlement cycles allow investors across different regions in the world facing

different local holiday arrangements to settle trades on T+4 and beyond, mitigating

operational risks. Offshore investors can now apply for special settlement cycles through

the Bond Connect Backup Trading Service of BCCL, while the subsequent settlement

procedures remain consistent with the usual protocol.

Through the recycling settlement service, investors can opt for recycling settlement within

the next three business days following the original contracted settlement date by applying

to China Central Depository & Clearing Co., Ltd. (CCDC) or Shanghai Clearing House

(SHCH) should a trade fails to settle on schedule.

Bond Connect Provides Special SettlementCycles and Recycling Settlement

Policy and Peers Updates


CFETS: 9 Institutions Join Bond Connect as Market Makers

China Foreign Exchange Trade System (CFETS) news - in order to further expand the

depth and breadth of the Bond Connect, from April 8 onwards, Bond Connect market maker

panel will add 9 new members (now 56 in total): i.e. Post Savings Bank of China, Bank of

Qingdao, Bank of Dalian, Bank of Changsha, Bank of Hankou, Guosen Securities, Sealand

Securities, Shanxi Securities, and First Capital Securities.

Special Topics

Offshore RMB Express

RMB Exchange Rate Trends Amid Pandemic in Europe and the U.S.

7

International financial markets experienced a volatile quarter amidst the outbreak ofCoronavirus. In particular, since massive increase in confirmed Coronavirus cases inEurope and the US, the volatility of major international currencies and some emergingmarket currencies increased significantly. RMB exchange rate also experienced arelatively large degree of depreciation. As of March 31, CNH closed at 7.0917, down1.91% compared to the previous quarter. CNY and the RMB’s central parity rate againstthe USD closed at 7.0851 and 7.0825 respectively, down 1.56% and 1.71% compared tothe previous quarter.

Ying Jian, Senior Economist

I. Virus outbreak in Europe and theUS increased global sentiment of riskaversion

Coronavirus is one of the few black swan or

grey rhino events in recent years. It was hard

to predict the outbreak of the virus, let alone

massive spreading in one month time, with

major economies in Europe and America all

suffering from the virus. The economic

impact was also out of expectations,

disrupting normal economic activities,

creating vigorous fluctuations in global

equities, forex, bonds, and commodities, etc.

We also expect a downtrend of various

economic indicators, which would lead to

another wave of market turbulence.

The global financial market in Q1 2020 was

characterized by its significant increase in

volatility of various financial assets. US Dow

Jones index dropped 23% throughout the

quarter, with highest and lowest points at

29551 and 18592 respectively, with a 37%

adjustment at the maximum level. Nasdaq

index decreased 14% during the same period,

with maximum adjustment at 30%. Gold price

rebounded 3.6%, after a preceding sharp fall

of 11.9%. US 10-year treasury yield dropped

from 1.9175% at end of last year to 0.677%

on March 31 this year (quarter low at

0.5403%), decreasing 1.24%. Italy, which

was hit the hardest by the virus, had its 10-

year bond yield rising from 0.903% to

2.377%, up 1.474%. Due to the above, the

outbreak of Coronavirus seriously hammered

investors’ confidence, herding them toward

relatively safe assets in a risk-off market.

Special Topic


Risk adverse appetite had been reflected by

the global rush into USD in the foreign

exchange market. Global currencies besides

USD depreciated, with some emerging

market currencies exchange rate seriously

hit. On March 31, the dollar index (DXY)

closed at 98.91, appreciating 2.6% compared

to the previous quarter, with the highest level

at 102.82, and maximum increase at 8.3%.

Euro and JPY depreciated 1.6% and 1.1%,

and respectively at one point depreciated

6.6% and 8.8%. AUD recorded the largest

depreciation of 18.2% in Q1 2020, RUB, BRL,

ZAR depreciated 31.0%, 27.9% and 27.3%

at maximum. Among Southeast Asia

currencies, IDR, MYR, THB saw a greater

level of adjustment, depreciating 22.3%,

9.6% and 8.9% at maximum.

II. Market sentiment posed significantimpact on the RMB exchange rate

The recent years have seen increasing

interaction between RMB exchange rates

and other currencies. After the financial crisis

and Europe debt crisis, USD became the

dominating currency, with EURO, GBP, and

JPY being left in a passive position.

Movement of RMB exchange rates was more

in tandem with EURO, GBP and JPY, thus

bearing an inverse relation with DXY.

The RMB exchange rate was affected by

both internal and external factors, including

China, Europe and the US economic

performances and monetary policies, China

18000

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Chart 1 Dow Jones Industrial Average

Source: Bloomberg, BOCHK

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Chart 2 Crude Oil Futures


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Chart 3 The Dollar Index (DXY)Source: Bloomberg, BOCHK

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Euro Yen

Chart 4 EUR/USD and USD/JPY


Special Topic


capital market reform, and RMB

internationalization policies, while not

glossing over the black swan or grey rhino

events. In May 2018, the US hastily

announced tariffs on China imports, and as a

result CNH depreciated 8.7% in 2 months.

The US and China started tough trade

negotiations, which then dominated the

agenda of the ensuing months. CNH rose to

6.7 when headway was made, but when

trade tensions intensified, CNH fell below 7

level and once approached 7.2. Following

the breakthrough in the trade negotiation at

the end of 2019 and the signing of the Phase

One deal on Jan 15 2020, the reduced trade

tensions have alleviated the unfavourable

impact on CNH.

However, it did not take long before the new

black swans and grey rhinos hit. In late

February, the Coronavirus broke out in some

China provinces, and China had to introduce

strict virus prevention and control measures

of unprecedented scale, impacting normal

travelling and living of citizens. During the

Chinese New Year, CNH continued trading

and saw a weakening trend, bordering below

the 7 level a few times.

Economic activities tended to deviate from

the norm during Chinese New Year holidays,

with longer lags in data reporting and wider

ranges of fluctuation. With such expectations,

the impact on RMB exchange rates would

have been limited. The less than desirable

performance of economic data between

January and February 2020 had also been

accounted for by the market. The Chinese

Government became more proactive in

financial policies and more flexible in

monetary policies, ensuring market liquidity,

and guided corporate loan interest rates

lower, stabilizing investors’ confidence.

However, the rapid outbreak of the pandemic

overseas in February caused the collapse of

international financial markets, significantly

increasing global risk aversion. With even the

safest assets such US 10-year treasuries

and gold being sold off, investors preferred to

hold cash. The Fed re-activated the

quantitative easing program (QE), introduced

a lot of unconventional policies and tools,

swapped currencies with other central banks

to increase USD liquidity. Until now, the

impact from Coronavirus outbreak has not

yet been reflected in major economic

indicators, therefore, this round of global

financial market turbulence was mainly

caused by an increase in risk aversion. CNH

depreciated sharply to 7.165 on March 19

amid external uncertainties.6.26.46.66.8

77.2

5/1/

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Chart 5 USD/CNH


Special Topic


III. The trend of RMB in the short termdepends on the evolution of thepandemic

With current global economic disruption and

weak stock and commodity prices, investors

remain risk averse and cram into the safety

of U.S. government bonds. The yield on the

benchmark 10-year Treasury note reaches

0.582% on April 1. This market situation may

continue for some time for reasons below:

First, the Covid-19 outbreak in Europe

and America has not been effectively

controlled, and the possibility of further

deterioration cannot be ruled out. The

number of confirmed cases worldwide

exceeded 920,000 by April 1, with major

European and American countries

accounting for three quarters. There were

46,000 deaths, with 80% from major

European and American countries. The

stormy clouds of this pandemic still hang

heavily over the Europe. Trump said that

keeping U.S. Covid-19 deaths under 100,000

would be a ‘very good job’. Some experts

predict that a final U.S. coronavirus death toll

would be somewhere around 200,000.

According to this, the number of confirmed

cases could reach one to two million. In the

worst scenario, it would be difficult to

estimate the damage worldwide, and

unprecedented volatility in the market will be

inevitable.

Second, the negative impact of the

pandemic on the global economy in some

cases will exceed levels last seen during

the financial crisis and very likely cause a

great depression. Economists’ forecast for

GDP growth in 2020 tends to be more and

more gloomy and agreed that the economic

impact of the coronavirus outbreak will not

show fully until the second quarter this year.

In late March, JP Morgan said U.S. GDP

could drop 14% in second-quarter (Morgan

Stanley: 30.1%, Goldman Sachs: 24%).

Morgan Stanley and Goldman Sachs

expected the world economy to contract

about 1% this year. On 31 March, Goldman

Sachs lowered its forecast for U.S. GDP to

34% and raised the forecast for the

unemployment rate to 15%. It is conceivable

that such adjustments will hit market

confidence and spark massive volatility,

especially as unfavorable data are released.

Third, some risk indicators may

deteriorate and cause debt crisis in some

countries. After examining main indicators

for sovereign risk and systemic risk, the

fiscal situation of few worst-hit European

countries is still normal. The fiscal deficit

accounts for less than 3% of GDP for Italy,

France, and Spain, but the government debt

to GDP ratios are relatively high around

100%-135%. Government costs are piling up

for combating the virus outbreak and

shielding companies and households from its

Special Topic


impact while fiscal revenue plunge as a

result of economic slowdown. It is possible

that debt crisis of few major EU countries

could cause financial turmoil worldwide.

Facing such an economic maelstrom that

could be more painful than the 2008 financial

crisis, the uncertainty of RMB exchange rate

has increased. In the short term it mainly

depends on two factors:

1. Internal factors are important pillars

supporting the RMB exchange rate. The

virus outbreak in China has been put under

control in the short term and the chance for

large-scale community transmission is

relatively low. Social life and economic

activities are gradually back to normal, and

the PMI has rebound in March. Although

global economic activities would take time to

recover under unfavorable situations such as

weakened demands and supply chain delays,

the foundation is established. In addition,

China is one of the few countries that still

applies conventional monetary policy. The

China–U.S. interest rate differential

maintains on a relatively wide level, and

offshore investors are increasing their

holding of onshore RMB assets, which also

benefits the RMB exchange rate.

There is a time lag for virus outbreak

between China and Europe/U.S., so is its

impact on the economy. China was worst-hit

by the virus in February, and its economy in

the first quarter suffered the most. While the

disease broke out in Europe and the US in

March and extended to April, the economic

data in the second quarter should be more

affected. Therefore, if China’s slow economic

reboot continues, while the U.S. and

European economies are still struggling, it

would be helpful in stabilizing the RMB

exchange rate.

2. External factors are triggers for RMB

fluctuations. The dollar has buoyed as

worries about massive economic disruption

caused by the coronavirus pandemic prompt

investors to dump riskier assets and look for

havens. In the short term, the DXY remains

high, putting a further downward pressure on

RMB. In addition, if a sudden credit crunch,

systemic risk, or sovereign debt crisis occurs,

it may cause panic and herd effects,

triggering more market volatility. Therefore,

it’s too early to rule out CNH's further

divergence from CNY in a short period of

time.

Special Topic


In general, RMB exchange rate is supported

in many ways on the fundamentals side, but

from market perspective, it’s not all optimistic.

We list two scenarios below:

In the first scenario, the virus outbreak in

Europe and America has passed the so-

called inflection point and has been gradually

put under control. Along with the recovery of

global risk appetite, the downward pressure

on RMB has eased. CNH mainly fluctuates

between 7 and 7.1 and has the opportunity to

rebound further if any positive data release.

In the second scenario, the pandemic

continues to spread in Europe and America,

and cause great economic recession in U.S.

or sovereign debt crisis across Europe. CNH

will be under greater pressure with room for

more flexibility.

Chart Book


Market Indicators

Hong Kong RMB Deposits (in RMB bn) Hong Kong RMB Cross-border Trade Settlement (RMB bn)

USD-CNH and USD-CNY Exchange Rates

Source: HKMA Source: HKMA

Source: Bloomberg

Chart Book


CNH HIBOR Fixing (%)

Hong Kong Offshore RMB Bond Issuance (RMB bn)CNH & CNY China Sovereign Curve(%, 31 March 2020)

Source: Bloomberg

Source: Bloomberg Source: BOCHK Global Market estimate

End of Mar:

Chart Book


RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

#5

October 2016 February 202040.55%USD#1

EUR 32.26%#2

GBP 7.61%#3

JPY#42.11%CNY

EUR 32.61%#2GBP 6.81%#3JPY 3.42%#4

#51.82%#5 CAD

CNY#6 1.67%

USD#1 41.48%

1.73%#6

AUD

CAD

#7 1.57%

HKD#8 1.41%

Disclaimer: This report is for reference and information purposes only. It does notreflect the views of Bank of China (Hong Kong) or constitute any investment advice.

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Offshore RMB Express€¦ · 29.4 trillion in March 2020, up by 25.7% MoM. As of March 31, total...

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