Offshore RMB

Express Issue 63 ‧

May 2019

Contents

Part 3

Part 4

Part 1

Special Topic

Chart Book

Market Review

Part 2 Policy and Peers Updates 4

5

1

Editors：

Annie Cheung

Tel ：+852 2826 6192

Email : anniecheung@bochk.com

Matthew Leung

Tel：+852 3982 7177

Email: matthewleung@bochk.com

Sharon Tsang

Tel ：+852 2826 6763

Email: sharontsang@bochk.com

10

Market Review

Offshore RMB Express 1

I. RMB briefly reached a 9-month

high

RMB remained stable in April and briefly

reached a nine-month high in the middle of

the month. However, it started losing steam

afterwards as major FX markets were closed

on Easter holidays and USD rose to a two-

year high, causing RMB to drop back to early

April level. On April 30, the RMB’s central

parity rate against the USD closed at 6.7286,

flat from last month. CNH closed at 6.7372,

down by 0.2% MoM. Meanwhile CNY closed

at 6.7348, down by 0.3% MoM.

Sino-US interest rate spread widened

(10-year treasury yield spread widened to

over 80 basis points), China's foreign

exchange reserves remained steady, and

RMB assets have become more attractive,

supporting the RMB exchange rate. On the

other hand, the US GDP grew 3.2% in the

first quarter, beating expectations. With

further deterioration in the Eurozone

economy, the USD is unlikely to weaken in

the short term. Considering these, the RMB

exchange rate against the USD is expected

to experience two-way fluctuation.

In terms of CNH HIBOR, the liquidity of

CNH remained stable in April. On April 30,

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

rates were 2.51%, 2.54% and 3.04%,

respectively.

II. RMB cross-border trade settlement

volume reached a 3-year high

By the end of March 2019, RMB

deposits in Hong Kong amounted to RMB

602.2 billion,

Major offshore RMB business indicators and international use of RMB continued to

increase in April. Several indicators recorded multi-month highs, with RMB cross-border trade

settlement volume at a 3-year high and RMB exchange rate a 9-month high at various points.

Bond Connect introduced new enhancements, with the number of institutional investors

breaching 800. Assets of overseas RMB funds topped RMB 300 billion. These funds provide

capital assistance, promote RMB internationalization, and also help Chinese companies in their

go-global strategy.

Offshore RMB Market Develops

Steadily

Market Review

Offshore RMB Express 2

down by 1.0% MoM and up by 8.6% YoY.

Meanwhile, RMB loans outstanding in Hong

Kong were RMB 114.9 billion, up by 7.4%

MoM and down by 17.0% YoY. The total

remittance of RMB for cross-border trade

settlement was RMB 464.5 billion in March, a

3-year high, up by 37.2% MoM, and up by

38.4% YoY. RTGS turnover was RMB 20.9

trillion in April 2019, same as previous month.

As of April, 2019, the dim sum bond issuance

amounted to RMB 31.1 billion.

In March 2019, SWIFT showed that the

RMB retained its position as the fifth most

active currency for domestic and

international payments by value, with a share

of 1.89% (1.85% in February 2019), behind

USD, EUR, GBP and JPY. RMB payments

value increased by 17.0% compared to

previous month, while in general all

payments currencies increased by 14.5%.

III. Bond Connect introduced new

enhancements with the number of

institutional investors breaching 800

In March 2019, foreign investors’ RMB

bond holdings amounted to RMB 1.76 trillion,

up by RMB 11.9 billion compared to last

month and up by 35.2% YoY. Monthly total

trading volume of Bond Connect reached

RMB 116.9 billion in 22 trading days in April

2019. Average daily turnover surged to RMB

5.31 billion. Global investors’ monthly net

purchase of Chinese bonds through Bond

Connect amounted to RMB 35.6 billion.

Chinese government bonds, policy financial

bonds, and NCDs accounted for 92% of total

turnover in April 2019. At present, the

number of international investors surged to

845 from 503 at the end of 2018, including

the first batch of investors from Sweden and

Netherland. Bond Connect is expanding its

coverage to 27 jurisdictions across the globe.

Bond Connect launched the NCD

primary subscription service on 29 April 2019

to further facilitate the participation by

international investors in this increasingly

popular asset class, also, HKMA CMU

extended securities settlement and cash

input deadlines with effect from April 29,

2019, allowing for more sufficient time for

fund preparation and efficiency in investment

turnover, further improving the mechanism.

Market Review

Offshore RMB Express 3

IV. Steady progress of opening up in

domestic capital markets

According to statistics from the State

Administration of Foreign Exchange (SAFE),

by the end of April 2019, the approved quota

for RMB Qualified Foreign Institutional

Investor (RQFII) was RMB 670.7 billion, up

by RMB 9.7 billion from previous month;

while the approved quota for Qualified

Foreign Institutional Investors (QFII)

increased by USD 4.2 billion to USD 105.8

billion. The approved quota for Qualified

Domestic Institutional Investors (QDII)

totaled USD 104.0 billion, up by USD 0.8

billion MoM, with a total of 152 qualified

domestic institutional investors, same as

previous month.

V. Overseas RMB funds topped RMB

300 billion

The People’s Bank of China announced

that as of 1Q19, overseas RMB funds topped

RMB 300 billion. They serve mainly as a

project investment channel, including

offshore RMB loans, debt investments,

equity investments and cross-border

guarantees, etc., covering industries such as

transport, power, finance, manufacturing and

other important industries.

The commencement and rapid

development of overseas RMB funds

represent increasing demand for RMB from

belt and road countries and international

capital markets. Overseas RMB funds

provide capital assistance, promote RMB

internationalization, and also help Chinese

companies in their go-global strategy.

Policy and Peers Updates

Offshore RMB Express 4

BOC issued USD 3.8 billion “Belt and Road”

bonds On April 10, Bank of China (BOC) issued USD 3.8 billion worth of “Belt and Road”

bonds overseas. 8 types of bonds were issued in 5 currencies, covering USD, EUR, AUD,

RMB and HKD. The issuers included BOC branches in Hong Kong, Macao, Sydney,

Luxembourg and Frankfurt. The bonds would be listed on the Hong Kong Exchange,

China Europe International Exchange, Frankfurt Stock Exchange and Luxembourg Stock

Exchange.

BOC has issued 5 batches of Belt and Road bonds since 2015, with a total value of

around USD 15 billion in 7 currencies, including RMB, HKD, EUR, USD, etc.

Mainland is set to introduce 12 financial opening measures in near-term

In early May, Guo Shuqing, Chairman of the China Banking and Insurance

Regulatory Commission, said during an interview that 12 new measures of financial

opening will be introduced in the near future. In terms of the banking sector, the

ownership limits in Chinese commercial banks for sole foreign shareholder will be

eliminated. In addition, the requirements of USD 10 billion and USD 20 billion for foreign

banks to set up foreign-funded banks and subsidiaries respectively in China will be

scrapped. In terms of scopes of business, foreign banks will be allowed to conduct RMB

businesses upon their establishment by removing approval procedures.

In terms of the insurance sector, overseas financial institutions will be allowed to

become shareholders of foreign-owned insurance companies in China, and set up

insurance institutions. Moreover, the requirements for foreign insurance brokerage

companies of having more than 30 years of operating experience and assets of more

than USD 200 million will also be eliminated.

Effective from May 15, the People’s Bank of China (PBOC) will carry out the same

operation as the rural credit cooperatives for rural commercial banks operating in county-

level administrative region or having branches in other county-level administrative region

with assets lower than RMB 10 billion. Currently, the reserve requirement ratio (RRR) for

rural credit cooperatives is 8%. This move will inject about RMB 280 billion of long-term

liquidity.

PBOC announced targeted RRR cut

Special Topics

Offshore RMB Express ５

On April 1, 2019, RMB-denominated China government bonds and policy bank bonds

were formally incorporated into the world's major bond index, the “Bloomberg Barclays Global

Aggregate Index”. The inclusion of RMB bonds in the global major bond index is conducive to

further promoting the opening of the Chinese bond market, attracting foreign investment into

the Chinese financial markets and maintaining the external balance of the Chinese economy.

Dr. Zhihuan E, Chief Economist of Bank of China (Hong Kong)

Kam Liu, Analyst

I. Estimation of the size of foreign

investment by including RMB

bonds in global major bond

indices

At present, there are three major bond

indices in the overseas bond market: Citi

World Government Bond Index (Citi WGBI),

JPMorgan Government Bond Index-

Emerging Markets (JPM GBI-EM) and

Bloomberg Barclays Global Aggregate Index.

1. Estimation of RMB bonds included in

the Bloomberg Barclays Global

Aggregate Index

On January 31, 2019, Bloomberg

officially confirmed that RMB-denominated

China government bonds and policy bank

bonds will be included in the Bloomberg

Barclays Global Aggregate Index from April

and will be completed step by step within 20

months. According to the information

provided by Bloomberg, 363 Chinese bonds

will be included in the Bloomberg Barclays

Global Aggregate Index, with a monthly

increase of 5%. After full inclusion, RMB-

denominated Chinese bonds will account for

6.03%, becoming the fourth largest currency

after the US dollar, Euro and Yen.

The Inclusion of RMB Bonds in

Global Major Bond Indices Helps

Attract Foreign Capital Inflows

Special Topic

Offshore RMB Express ６

At present, the Bloomberg Barclays

Global Aggregate Index covers more than

USD 54 trillion in assets, with approximately

USD 2-3 trillion worth of assets around the

globe tracking it. Based on inclusion share of

6.03% and considering global capitals may

not fully mimic the index when tracking it, the

Chinese bond market will usher in about

USD 100 billion in capital inflows in the next

20 months, about USD 50 billion of which will

come in before the end of 2019.

2. Estimation of RMB bonds included

in Citi World Government Bond Index

Apart from the Bloomberg Barclays

Global Aggregate Index, Citi World

Government Bond Index (Citi WGBI) and

JPMorgan Government Bond Index-

Emerging Markets (JPM GBI-EM) may also

consider including Chinese bonds in the

future.

On March 6, 2017, Citigroup's fixed

income index department announced that the

Chinese market has met the conditions for

joining the three existing government bond

indices, including the Emerging Markets

Government Bond Index (EMGBI), the Asian

Government Bond Index (AGBI), and the

Asia Pacific Government Bond Index

(APGBI). In July 2017, Citigroup included

China in the “World Government Bond Index-

Extended Market” (WGBI-Extended), while

Citigroup announced that it will release two

new bond indices – the Citi China Bond

Index and the Citi China Interbank Bond

Index. However, Chinese bonds have not yet

been included in the WGBI main index. The

market expects Citi to officially announce

whether it will include Chinese bonds in

WGBI in September this year.

However, the WGBI main index has

strict requirements on the capital control of

the economy. Although China has reformed

the investment quota, fund lock-up period,

fund remittance and transaction type of

foreign capital entering the inter-bank bond

market since May 2016, currently China still

has not fully opened its capital account. So, it

is conservatively estimated that China bonds’

share after inclusion may be 5%-10% and

may only increase gradually. Assets

currently tracking the Citi WGBI are

approximately USD 2 trillion, which means

that the inclusion in the Citi WGBI will result

in a capital inflow of around USD 100-200

billion

Sources: Public information, BOCHK Research.

Special Topic

Offshore RMB Express ７

3. Estimation of RMB bonds included

in JPMorgan Government Bond

Index-Emerging Markets

The JPMorgan Government Bond Index-

Emerging Markets (GBI-EM) consists of

three main indices, namely GBI-EM Broad,

GBI-EM Global and GBI-EM. As of now,

RMB bonds have been incorporated into

GBI-EM Broad but not yet been incorporated

into GBI-EM Global and GBI-EM. The index

mainly covers emerging markets, and the

economies included in the index have a 10%

market weight cap.

Given the sizable Chinese bond market

and with reference to the 10% share in the

GBI-EM Broad, the weight of Chinese bonds

in the GBI-EM Global and GBI-EM is likely to

reach the upper limit of 10%. If JP Morgan

adopts a step-by-step arrangement, the

share of Chinese bonds included in GBI-EM

may be around 8%-10% in the next three

years. The current asset size of the

JPMorgan Chase Global Emerging Markets

Bond Index is approximately USD 200-250

billion, which means that the inclusion will

result in approximately USD 16-25 billion of

foreign capital inflows.

Sources: Public information, BOCHK Research

In summary, the total assets under

management of the world's three major bond

indices are about USD 4-4.5 trillion. After

Chinese bonds are included, the weight of

Chinese bonds in each index will be about

5% to 10%, which can drive RMB 200 billion

of global capital inflows in the near term.

Assuming the completion of including all of

Chinese bonds in global major bond indices

in three years, it will be able to drive about

USD 350 billion of passive flows into the

Chinese bond market.

Sources: Bloomberg, Citi, FTSE Russell, Public

information, BOCHK Research

If we consider active investments, the

scale of overseas capital inflows attracted to

the Chinese bond market may reach USD

500-1000 billion in the next five years.

Special Topic

Offshore RMB Express ８

II. Outlook of further reform in the

Chinese bond market

The lack of internationalization of

Chinese bond market is due to capital control

and the limited openness of domestic interest

rates and foreign exchange derivatives

markets. In terms of capital control, although

the restrictions on remittance of funds have

been lifted, supervision still requires that the

currency structure of the funds remitted by

investors should be basically the same as

the ratio of local and foreign currencies at the

time when they come in, and the variance

should not exceed 10%. This raises foreign

investors’ concerns about the remittance of

funds. In terms of foreign exchange

derivatives, only foreign central banks can

participate in the interbank foreign exchange

market for spot transactions. In addition,

under the “Northbound” of Bond Connect,

although foreign investors can use CNY to

exchange for foreign currencies, there are

constrains on entering domestic foreign

exchange derivatives market via overseas

settlement banks. Since there is a price

difference between the onshore and offshore

RMB exchange rates, it means that investors

cannot fully hedge foreign exchange risk. In

terms of interest rate derivatives, trading in

Bond Connect is only limited to spot trading,

and foreign institutional investors are unable

to conduct bond repo transactions and

sovereign bond futures market transactions,

making it difficult to fully hedge interest rate

risk.

These constraints weigh on the

attractiveness of Chinese bond market to

foreign investors and are the main

shortcomings of the current "Bond Connect".

In response to the concerns raised by foreign

investors, the Chinese regulatory authorities

indicate that they will further optimize

relevant institutional arrangements and

accelerate the opening of the bond market.

This move will attract more foreign

institutions to enter the Chinese bond market,

promoting the internationalization of Chinese

bond market while maintaining the overall

balance of cross-border capital flows and the

basic balance of international payments.

Chart Book

Offshore RMB Express 10

Market Indicators

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

USD-CNH and USD-CNY Exchange Rates

Source: HKMA Source: HKMA

Source: Bloomberg

Chart Book

Offshore RMB Express 11

CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)

CNH & CNY China Sovereign Curve (%, 30 Apr 2019)

FTSE-BOCHK Offshore RMB Bond Composite Index

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: BOCHK Global Market estimate

End of Apr:

End of Apr:

Chart Book

Offshore RMB Express

October 2016 March 2019

40.55% USD #1

EUR 32.26% #2

GBP 7.61% #3

JPY 3.38% #4

1.89% CNY

EUR 33.75% #2

GBP 7.24% #3

JPY 3.46% #4

#5 1.82% #5 CAD

CNY #6 1.67%

USD #1 40.01%

1.78% #6

HKD

CAD

#7 1.57%

AUD #8 1.56%

12

RMB Clearing Transaction Value (RMB tn)

SWIFT World payments currency ranking & market share

Source: HKICL

Source: SWIFT

15

Disclaimer: This report is for reference and information purposes only. It does not

reflect the views of Bank of China (Hong Kong) or constitute any investment advice.

Please follow BOCHK Research on WeChat for the latest economic and financial markets analyses