Offshore RMB
Express Issue 60 ‧
February 2019
Contents
Part 3
Part 4
Part 1
Special Topic
Chart Book
Market Review
Part 2 Policy and Peers Updates 4
6
1
Editors:
Annie Cheung
Tel :+852 2826 6192
Email : [email protected]
Matthew Leung
Tel:+852 3982 7177
Email: [email protected]
Sharon Tsang
Tel :+852 2826 6763
Email: [email protected]
14
Market Review
Offshore RMB Express 1
I. RMB exchange rate against USD
strengthened
Following temporary easing of the trade
tensions and the US Federal Reserve
becoming dovish, RMB exchange rate
against USD strengthened in January. RMB
appreciated against USD for three
consecutive months with the greatest
monthly appreciation since February 2018.
On January 31, the RMB’s central parity rate
against the USD closed at 6.7025, up by
2.1% compared to early January. CNH
closed at 6.7099, up by 2.3% MoM,
meanwhile CNY closed at 6.7004, up by
2.6% MoM. RMB exchange rate against USD
is expected to remain two-way fluctuation or
maybe on a slightly rising trend as trade
negotiations continue, and a solid one-way
moving trend is unlikely in the near future.
On January 31, the O/N, 1-week and 3-
month CNH HIBOR rates were 1.34%,
2.00% and 3.05%, respectively.
II. Major RMB Indicators Remain
Stable
By the end of December 2018, RMB
deposits in Hong Kong amounted to RMB
615.0 billion, down by 0.4% MoM and up
10.0% YoY. Meanwhile, RMB loans
outstanding in Hong Kong were RMB 105.6
billion, down by 9.0% MoM and 26.9% YoY.
The total remittance of RMB for cross-border
trade settlement was RMB 384.9 billion in
December, down by 2.1% MoM, while the
RMB exchange rate appreciated against USD in January. Major RMB business indicators
in the offshore market remained stable. Foreign institutions’ RMB bond holdings recovered,
while monthly trading volume of Bond Connect reached a record high. Central Bank of
Myanmar officially introduced the RMB as an option for cross- border settlements. Chinese
bonds will be added to the Bloomberg Barclays Global Aggregate Index in April. The People’s
Bank of China (PBOC) announced that they would issue RMB 20 billion bills in Hong Kong
again.
Offshore RMB Market Remains
Stable
Market Review
Offshore RMB Express 2
annual amount of RMB 4.21 trillion in 2018
was up by 7.2% YoY. RTGS turnover was
RMB 24.7 trillion in January 2019, up by
16.6% MoM. There was no public issuance
of dim sum bonds in January 2019, while
there was an issuance of RMB 1.0 billion in
January 2018.
III. International status of RMB further
enhanced
In December 2018, SWIFT showed that
RMB remained at the 5th place in the
currency rankings as an international
payments currency, with a share of 2.07%
(1.60% in December 2017), behind USD,
EUR, GBP and JPY.
On January 30, 2019, The Central Bank
of Myanmar officially introduced the RMB
and JPY as settlement options for authorized
dealer license holders in cross-border
payments and transfers. A full coverage of
RMB usage in all 10 ASEAN countries has
thus been achieved. This will be a prelude to
the accelerated use of RMB in the Southeast
Asia region. The adoption of the RMB as a
settlement option allows Myanmar to
promote regional economic integration, lower
the necessary administrative cost in
exchanging USD, boost trade activities,
facilitate cross border payments and expand
economic cooperation between China and
Myanmar.
IV. Foreign allocations into RMB
bonds recovered; monthly
transaction for Bond Connect broke
record
On January 31, 2019, Bloomberg
officially confirmed that it would include
Chinese bonds into Bloomberg Barclays
Global Aggregate Index starting in April this
year. In December 2018, foreign institutions’
RMB bond holdings amounted to RMB 1.73
trillion, up by RMB 83.8 billion compared to
last month and by 50.8% YoY. The inclusion’
reflects international investors’ confidence in
the Chinese economy and also represents
an important milestone on China’s path
towards more open and transparent capital
markets. This would better serve the needs
of global investors in their deployment of
RMB funds.
Market Review
Offshore RMB Express 3
Monthly total trading volume of Bond
Connect reached a record high of RMB
132.3 billion in January 2019. Average daily
turnover surged to RMB 6.0 billion, up by
68% MoM. Global investors’ monthly net
purchase of Chinese bonds through Bond
Connect amounted to RMB 27.6 billion. This
month, Bond Connect welcomed the first
Australian asset manager into the scheme.
The investor community has now grown to
558, including different types of investors
from 24 jurisdictions.
V. Steady progress of opening-up in
domestic capital markets
According to statistics from the State
Administration of Foreign Exchange (SAFE),
by the end of January 2019, the approved
quota for RMB Qualified Foreign Institutional
Investor (RQFII) was RMB 648.7 billion, up
by RMB 2.0 billion from previous month;
while the approved quota for Qualified
Foreign Institutional Investors (QFII)
increased by USD 300 million to USD 101.3
billion. The approved quota for Qualified
Domestic Institutional Investors (QDII)
totaled USD 103.2 billion, with a total of 152
qualified domestic institutional investors
approved, same as previous month.
On January 14, 2019, SAFE expanded
the quota for QFII to USD 300 billion from
USD 150 billion. On January 30, PBOC said
they would issue RMB 20 billion bills through
the Central Moneymarkets Unit of the Hong
Kong Monetary Authority, the second
issuance in Hong Kong following the one in
November last year.
Policy and Peers Updates
Offshore RMB Express 4
China further opens up financial markets On January 14, the State Administration of Foreign Exchange announced to double
the quota for the Qualified Foreign Institutional Investors (QFII) program to USD 300
billion. Subsequently, on January 31, the China Securities Regulatory Commission was
said to solicit public comments on consolidating the QFII program and the RMB Qualified
Foreign Institutional Investors (RQFII) program. The revisions would include: 1) QFII and
RQFII schemes are to merge, and foreign institutions will make a one-time application for
the qualification status; 2) qualification requirements are to relax; 3) scope of investment
is to expand. Investors will not only be allowed to buy the products within the current
investment scope, but also listed equities on the New Third Board, bond repurchases,
private investment funds, financial futures, commodity futures, options, etc.; 4)
management of custodians is to optimize; and 5) Ongoing supervision is to enhance.
Chinese bonds to be included in the Bloomberg Barclays Global Aggregate
Index
Bloomberg confirmed on January 31 that Chinese RMB-denominated sovereign and
policy bank bonds will be added to the Bloomberg Barclays Global Aggregate Index
starting April 2019 and phased in over a 20 month period. Using data as of January 24,
the index would include 363 Chinese bonds and represent 6.03% of a USD 54.07 trillion
index upon completion.
PBOC cut RRR
In order to support real economy and reduce funding cost, the PBOC cut the RRR by
0.5 percentage point respectively on 15th and 25th January, with net liquidity injection of
RMB 800 billion.
Policy and Peers Updates
Offshore RMB Express 5
CBM included RMB and JPY as official settlement currencies
On January 30, the Central Bank of Myanmar (CBM) announced that Authorized
Dealers license holders are permitted to use RMB and JPY in international payments and
settlements. Nevertheless, account opening for individuals or legal entities in these two
currencies is still prohibited.
PBOC issued sovereign bills in Hong Kong again
On February 13, the People’s Bank of China (PBOC) issued RMB bills through the
Central Moneymarkets Unit of the Hong Kong Monetary Authority. The issuance
contained RMB 10 billion 3-month bills and RMB 10 billion 1-year bills priced at 2.45%
and 2.80%, respectively.
Special Topic
Offshore RMB Express 6
Kam LIU, Analyst
Reform measures
The QFII scheme and the RQFII scheme
were originally launched in 2002 and 2011 to
support China’s capital markets opening.
Since then, China refined QFII and RQFII to
attract foreign investment by broadening the
investable universe, expanding the QFII and
RQFII quotas, changing qualification
thresholds and streamlining quota approval
process. Chinese regulators have also
gradually expanded the scope of foreign
institutional investors under these two
schemes to commercial banks, insurance
companies and other financial institutions as
well as medium and long-term investors
approved by the Chinese Central Bank.
Since 2015, reforms in QFII and RQFII
have deepened. In July 2015, PBOC allowed
three types of institutions, including foreign
banks, international financial organizations
and sovereign wealth funds, to enter the
interbank market and to carry out
transactions such as bond repurchase, bond
lending, bond forward, and interest rate
swaps, with no restrictions on the scale of
investment. In June 2018, China eased major
restrictions on QFII and RQFII, including
eliminating the monthly 20% repatriation limit
imposed on the QFII scheme, removing the
lock-up restrictions applicable to the
investment principal, and allowing QFIIs and
RQFIIs to enter onshore forex hedging
transactions to hedge currency risks. On
QFII and RQFII Undergoing
Further Reforms
Entering 2019, China is ramping up efforts to open its capital markets. On January 31, The
China Securities Regulatory Commission (CSRC) announced that it would ease foreign institutions’
access by combining two inbound investment schemes -- the Qualified Foreign Institutional
Investors (QFII) program and the RMB Qualified Foreign Institutional Investors (RQFII) program,
while broadening their investment scope to include derivatives, bond repurchases and private funds.
The deregulation on QFII and RQFII schemes will help introduce long-term capital, optimize investor
structure, and promote the opening-up as well as the healthy development of China’s capital
markets.
Special Topic
Offshore RMB Express 7
January 14, 2019, China doubled QFII quota
to USD 300 billion to meet demands from
overseas investors to expand investment in
China's capital markets.
QFII and RQFII in need of further
improvements
The encouraging developments of QFII
and RQFII produce positive results. As of
2018, total QFII quota reached USD 150
billion (currently USD 300 billion), and the
aggregated quota of USD 101.1 billion have
been granted to 309 QFIIs. RQFII has
expanded from Hong Kong to 19 countries
and regions. Total RQFII quota has reached
RMB 1.94 trillion, and the aggregated quota
of RMB 646.7 billion has been granted to 233
RQFIIs. The two schemes have been
operating in a steady manner, playing a
positive role in channeling long-term foreign
capitals into China, optimizing investors'
structure of the capital markets, carrying out
value investing, enhancing corporate
governance of listed companies, and
promoting the sound and steady
development of China's capital markets.
However, there still exist some
obstacles in QFII and RQFII, and further
improvements are needed to accommodate
the rapid development of China’s capital
markets.
Firstly, separate measures and
provisions of QFII and RQFII schemes
require overseas institutions to make two
applications. In addition, QFII sets stricter
quantitative criteria including requirements
on operating life and asset scale, while
RQFII has less stringent criteria and only
compliance requirements. Separate
provisions of QFII and RQFII will not only
complicate the investment process, but also
result in regulatory arbitrage.
Secondly, the surging enthusiasm of foreign
investors and increasing inflows of overseas
capitals require more investment facilitation
under QFII and RQFII. It can be clearly seen
that foreign holdings of RMB assets are
rising significantly since 2016 on the back of
China’s opening policies. By the end of 2018,
overseas investors hold RMB 1.15 trillion of
Chinese stocks and RMB 1.71 trillion of
Special Topic
Offshore RMB Express 8
Chinese bonds. CSRC pointed out that, with
two-way opening of the capital markets and
the economic restructuring underway, current
QFII and RQFII provisions are no longer
adaptable to the new environment of capital
markets in terms of qualification criteria,
investment operation, and ongoing
supervision.
New rules of QFII and RQFII
In order to channel more long-term
foreign capitals into China and further open
up its capital markets, regulators make
significant revisions on QFII and RQFII.
Firstly, separate QFII and RQFII
schemes are to merge. According the new
rules, foreign institutions shall make a one-
time application for the qualification status.
Meanwhile, institutions from countries and
regions without RQFII quota can only make
investments with funds raised in foreign
currencies.
Secondly, qualification requirements are
to relax. The quantitative criteria are
removed, whereas the compliance
requirements and the requirements on the
types of institutions are maintained.
Meanwhile, application documents are
simplified, and the review process
streamlined.
Thirdly, scope of investment is to expand.
Currently, foreign investors under the
scheme are allowed to buy Chinese stocks
and bonds, but the new rules greatly expand
their investment scope. Investors will be
allowed to buy securities traded on China’s
main over-the-counter equity market, the
New Third Board, and also invest in private
funds or conduct bond repurchase
transactions. In addition, foreign institutions
will also gain access to derivatives, including
financial futures, commodity futures and
options. Qualified investors are also allowed
to participate in margin trading and securities
lending in stock exchanges.
Fourthly, management of custodians is
to optimize. The management of QFII
custodian qualification will be shifted from an
approval-based item to a registration-based
item, and the new rules remove the
restriction on the number of custodians
appointed by a QFII.
Fifthly, ongoing supervision is to
enhance. The new rules improve QFII
account management, monitoring and
oversight mechanisms, require additional
disclosure of information on cross-border
transactions, and specify penalties.
Special Topic
Offshore RMB Express 9
Further opening-up of China’s capital
markets ahead
The consolidation of QFII and RQFII can
help streamline the approval process,
encouraging the repatriation of offshore RMB
funds. The relaxed qualification criteria and
the expansion of investment scope would
facilitate overseas investors to diversify their
allocation. On top of that, overseas investors
can manage their investment risks by using
derivatives. In a word, the QFII and RQFII
programs have been developing steadily and
played a positive role in introducing long-
term capitals, optimizing investor structure,
improving corporate governance of listed
companies and promoting
internationalization of the capital markets.
It is noteworthy that, besides revisions to
QFII and RQFII, infrastructures and
institutional arrangements for overseas
investment are being improved to lend
support to the further opening and healthy
development of China’s capital markets.
On one hand, tax policy for investing in
the China’s bond market has been clarified to
facilitate the investment of overseas
institutions, while onshore credit rating
business is recently opened up to foreign
ownership to promote the development and
trustworthiness of China’s credit ratings
services.
On the other hand, global index
companies will gradually include RMB assets
into their baskets, which could trigger inflows
worth of USD 0.2 - USD 0.3 trillion in the
short term and USD 0.5 - USD 1 trillion in the
longer term. Index provider MSCI has
already implemented an initial 5 percent
inclusion of China A shares in its China
indexes and related composite indexes, and
is proposing an increase of MSCI China A
large-cap securities to 20 percent of their
respective free float-adjusted market
capitalizations. Bloomberg have also
confirmed that Chinese RMB-denominated
government and policy bank securities will be
added to the Bloomberg Barclays Global
Aggregate Index starting April 2019,
representing about 6 percent of the index. It
is expected that infrastructures and
institutional arrangements will be further
optimized to facilitate foreign investment into
China’s capital markets.
Special Topic
Offshore RMB Express 10
Ricky CHOI, Senior Economist
Pursuing progress while ensuring
stability is the key theme for 2019
In the recent Politburo meeting, 2019 is
regarded as a pivotal year for securing a
decisive victory in finishing the building of a
moderately prosperous society in all respects.
Ensuring stable growth is one of the top
priorities for the Chinese government, and
should continue to uphold the underlying
principle of pursuing progress while ensuring
stability. Moreover, China will continue to
promote high-quality development,
implement proactive fiscal policy and prudent
monetary policy, and move to stabilize
employment, finance, foreign trade, foreign
investment, domestic investment and
expectations to ensure its economy to
maintain steady and higher quality growth
ahead.
Policy Support to Ensure Stable
Growth in 2019
China’s real GDP growth held largely steady at 6.6% in 2018, moderating from a downwardly
revised 6.8% in 2017. Growth momentum slowed in 2H 2018 amid escalating China-US trade
frictions and volatilities in the financial markets, with the quarterly growth showed gradual
deceleration from 6.8% in Q1 and 6.7% in Q2 to 6.5% in Q3 and 6.4% in Q4. Besides, nominal GDP
also moderated from 10.9% in 2017 to 9.7% in 2018, with the overall economic output reached RMB
90.0 trillion, equivalent to around RMB 64,500 per capita.
Special Topic
Offshore RMB Express 11
Fiscal policy to take the front seat to
drive growth. Both the domestic and
external headwinds are likely to persist in
2019. After several rounds of monetary
easing measures, expansionary fiscal policy
is likely to hold the key to support the
domestic economy in 2019, including an
individual income tax reduction for
households, tax and fee reductions for
corporates (value-added tax (VAT),
corporate income tax, corporate fee), tariff
cuts and higher tax rebates for exports,
higher infrastructure spending, as well as
subsidies on automobiles and home
appliances consumption, etc.
More targeted monetary easing
expected. Since the beginning of 2018,
PBOC has announced numerous measures,
including a total of six targeted required
reserve ratio (RRR) cuts (including twice in
January 2019), increasing the size of re-
discount and re-lending facilities by RMB 400
billion, launching the targeted medium
lending facility (TMLF) and establishment of
a credit enhancement facility to promote
corporate bond financing by private
enterprises, to lower the funding costs, and
ensure adequate credit flows, in particular for
those private enterprises, and small and
micro-sized companies, to support the real
economy.
Growth moderation in 2019
Looking ahead, further moderation in
China’s economic growth is expected in 2019,
with more notably deceleration in the
beginning of the year followed by some
recovery later in the year. Growth
momentum is expected to be hindered in the
near term by existing tariffs and the
uncertainties related to their negotiation
outcome. The external trade performance for
2019 will largely hinge on the negotiation
outcome between China and the US, and the
overall global economic conditions. Any
potential trade deal will likely involve
substantial efforts to reduce trade
imbalances between China and the US, with
China importing significantly more US
products. Hence, China’s trade surplus will
likely contract further with or without a deal.
On the domestic front, weakness in retail
sales might be of concern, but retail sales
excluding auto sales have been rather stable.
In 2019, it is expected that consumption will
likely remain stable, benefiting from the
recent individual income tax and import tariffs
reductions as well as the largely steady labor
market. In addition, a number of high growth
consumer service sectors, including tourism,
household services, healthcare services, etc.
have performed well over the past few
Special Topic
Offshore RMB Express 12
quarters. With the support of services
consumption, consumption will remain the
key driver for the economic growth ahead.
Meanwhile, investment growth might slow
further in early 2019, with real estate
investment likely cooling on the back of
slowing housing transactions under the
government policy stance. Manufacturing
investment will likely peak, given some
manufacturing industries, in particular heavy
industry, are still facing the problem of
excess capacity, and weak business
confidence amid uncertain economic outlook.
Infrastructure investment is likely to take up a
bigger role in driving investment as well as
overall economic growth. However,
infrastructure investment has already
reached a sizable scale. The marginal effects
from accelerating new infrastructure
investment will likely be diminishing.
Overall, the government still has
sufficient policy tools to stabilize growth in
2019, such as tax cuts, infrastructure
spending and subsiding automobiles and
home appliances consumption on the fiscal
policy front, as well as more targeted
monetary easing. It is believed that China’s
economy will only ease slightly to around
6.4% in 2019, remaining on the right track to
achieve the objective of building a
moderately prosperous society in all respects
in 2020. On the pricing front, the impact of
tariffs and African swine fever are expected
to boost the consumer price index somewhat
further, but the overall inflation should remain
under control.
Chart Book
Offshore RMB Express 14
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 15
CNH HIBOR Fixing (%) Hong Kong Offshore RMB Bond Issuance (RMB bn)
CNH & CNY China Sovereign Curve (%, 31 Jan 2019)
FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
End of Jan:
End of Jan:
Chart Book
Offshore RMB Express
October 2016 December 2018
40.55% USD #1
EUR 32.26% #2
GBP 7.61% #3
JPY 3.38% #4
2.07% CAD
EUR 32.98% #2
GBP 6.76% #3
JPY 3.36% #4
#5 1.82% #5 CAD
CNY #6 1.67%
USD #1 41.57%
1.84% #6
AUD
CNY
#7 1.57%
HKD #8 1.44%
16
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
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.
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