Growing your offshore RMB business

Growing Your Offshore RMB Business

Celine Tam

Analyst

Economics and Strategic Planning Department

Bank of China (Hong Kong) Limited

April 2015

2

A. RMB the Next International Currency?

B. Policy Initiatives and Offshore Market Development

C. Implications of Offshore RMB Business to Indonesian Firms


3

CNY vs. CNH?

Requirements for exchange conducted through “Trade Conversion Service”(CNY):

Trade in physical goods

Counterparty of trade transaction must be a Mainland China enterprise

Conversion date and amount should coincide with the proceeds/payment of the trade

settlement

CNH

RMB FX pricing in the offshore market

with overseas banks, which depend on

their own RMB open positions

Exchange rate is floating freely and

impacted by market supply and demand

of RMB

CNY

Onshore FX quotation with the China

Foreign Exchange Trade System

Exchange rate fluctuates around the

central parity rate with daily limits (2%

currently), and is relevant to China’s

national currency policy

CNH, the offshore RMB, is a freely convertible currency

4

World’s second largest economy

World’s largest trading nation

Ranking of RMB

Payment - 7th

Trade finance - 2nd

FX Trading - 6th

China continues to accelerate regulatory reforms towards RMB internationalization

RMB Internationalization Gathers Pace

0.25% Source: SWIFT

Jan 2012 Feb 2015 44.04%

USD

EUR

GBP

JPY

HKD

CNY

9.00%

2.48%

0.95%

29.73%

#1

#2

#3

#4

#10

#20

1.81%

43.09%

EUR

USD

GBP

JPY

CNY

8.57%

2.75%

28.95%

#1

#2 #3

#4

#5

#7

World Payments Currency Ranking & Market Share

1.85% CHF

1.82% CAD #6

5

RMB’s Growing Reputation among Central Banks

Bilateral currency swap agreements: with 31 central banks, amounted to more than RMB 3,100 billion

The swap agreements serve as a backstop RMB liquidity facilities in those countries or regions

Many central banks around the world have signed bilateral currency swap

agreements with People’s Bank of China

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

Currency swap amount

(RMB trillion)

Source: Wind, BOC

Armenia, 1bn

Suriname, 1bn

South Africa, 30bn

6

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 and easy acceptance

Singapore ICBC Singapore (May 2013) An established commodity and 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

More RMB Clearing Banks were Designated by PBoC

New offshore RMB centers are emerging, and each has its own niche and strength

7





8

2007 2004 2009 2011 onwards

Phase 1: Retail RMB banking service

Feb 2004 – Introduction of RMB business, including deposit-taking, remittance, currency conversion & bank card business

Phase 2: Offshore RMB bonds market

2007 – Issuance of RMB bonds in HK (“Dim Sum Bond”) by Mainland financial institutions

Phase 3: Cross-border RMB trade settlement

2009 – Implementation of Pilot scheme of cross-border RMB Trade Settlement

Phase 4: Promoting use of RMB in investment

Capital account is gradually liberalized

Bank of China (Hong Kong) was

appointed as the RMB Clearing

Bank in Hong Kong in 2003,

which marked the start of the

Hong Kong offshore RMB

market

Major Milestones of the Offshore RMB Market

Offshore RMB business scope has been expanding in an orderly manner

9

1. RMB FDI and ODI

Foreign Direct Investment settled in RMB 862 billion (2014)

Overseas Direct Investment Settled in RMB 187 billion (2014)

Mainland

China RMB

Major Policies Development

Capital

China encourages the use of RMB in cross-border trade and investment

Source: PBoC, HKMA, BOCHK Research

Trade RMB Cross-border trade settlement

Trade has been fully open since Jun 2012

24% of cross-border merchandise trade settled in RMB

(2014)

2. RMB Bond Markets

Onshore: Central banks, RMB CBs and PBs can invest

in Mainland’s inter-bank bond market

Offshore: RMB 587 billion outstanding (End 2014)

3. RMB Qualified Foreign Institutional Investor

RMB 820 billion of investment quota (Jan 2015)

4. Pilot Zones Shanghai Free Trade Zone,

Qianhai Special Economic Zone,

New Free Trade Zones in Guangdong, Tianjin & Fujian

5. Shanghai-Hong Kong Stock Connect Scheme

RMB 550 billion of investment quota (Mar 2015)

10

The Growing Cross-border RMB Trade Settlement

In 2014, the volume of cross-

border RMB trade settlement

was RMB 6.6 trillion, an YoY

growth of 57%

About 24% of China’s cross-

border trades were settled in

RMB in 2014

Cross-border RMB trade

settlement has reached more

than 220 countries /regions or

98% countries /regions around

the globe Source: PBoC

Cross-border RMB trade settlement

(RMB billion)

3.6 506

2081

2940

4630

6550

2009 2010 2011 2012 2013 2014

RMB becoming a popular trade settlement currency

11

Rapid Expansion of the Offshore RMB Bond Market

Since the first RMB bond in HK in 2007,

the offshore RMB bond market has

developed rapidly

The most important backbone to develop

RMB bond market in Hong Kong is the

support from China’s central government,

especially the Ministry of Finance, state

policy banks and some other major

financial institutions

RMB sovereign bonds and quasi-

sovereign bonds together accounted for

more than 30% of total offshore RMB

bond issuance in 2014

Source: BOCHK, Bloomberg

Offshore RMB Bond Primary Issuances

(RMB billion)

10 12 16

35

105 112

104

202

2007 2008 2009 2010 2011 2012 2013 2014(Sep)

Depth and width of the offshore RMB bond market continue to develop substantially

12

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

Starting from 2013, the RMB

Qualified Foreign Institutional

Investors (RQFII) scheme was

expanded to other regions

As of Jan 2015, the total

RQFII quota granted has

increased to RMB 820bn

RQFII Quota Distribution

(RMB billion)

RQFII Quota Distribution

(RMB billion)

Source: PBoC, BOCHK

80

80

80

80

50

80

50

270 270 270

20

2011 2012 2013 2014

30 50 50

March 2015

80

80

80

80

50

270

Qatar

Hong Kong

UK

Singapore

France

Korea

Germany

Canada 50

Australia 50

Switzerland 50

30

A widening channel for offshore RMB funds to access China’s domestic bond and

stock markets

13

“Gradual relaxation on the first line with efficient control mechanisms at the back”

Promote financial reform from four aspects:

1. Cross-border use of RMB, 2. Capital account convertibility,

3. Interest rate liberalization, 4. Foreign exchange management

Innovative arrangement in cross-border use of RMB:

Cross-border two-way RMB cash pooling: Corporates in FTZ can set up special RMB

deposit accounts for handing intra-group two-way cross-border RMB cash pooling

Cross-border RMB loan: Allowing non-bank FIs and corporates in FTZ to borrow RMB

fund from the offshore market, subject to “Macro Prudential Policy Parameter” or quota

management framework

Accelerating Capital Account Liberalization in Test Zones

Recently introduced policies aiming to promote financial market liberalization will

have considerable influence on promoting offshore RMB centre development

New Free Trade Zones announced for Tianjin, Fujian and Guangdong (includes

Qianhai Special Economic Zone)

• Shanghai Free Trade Zone

14

Stock Connect: Connecting Opportunities from All Over the World

• The Shanghai-Hong Kong Stock Connect - A

mutual market access program, through which

investors in Hong Kong/Overseas and

Mainland China can trade shares listed on

the other market respectively via the

exchange and clearing house in their local

market under a quota scheme

• A significant development for RMB capital

account liberalization

• It is expected that “Shenzhen-Hong Kong

Connect” and “Mutual Recognition for

Investment Fund” between Hong Kong and the

Mainland will be introduced in the future

Source: Hong Kong Stock Exchange

Illustration of Orderly Flow of

Funds

Total quota: 300 bn

Daily quota: 13bn

Total quota: 250 bn

Daily quota: 10.5bn

Expanded investment channels for offshore RMB funds

15

Outlook of RMB Internationalization

Global use of RMB gathers pace

Apart from the strong position in Asia-pacific countries,

western developed countries have also gained momentum

to participate in RMB community

Capital account liberalization will be the next policy focus

Foreign investors are gaining more access to China’s

capital market

On track to be a global reserve currency:

• Potential Inclusion of RMB in the IMF’s Special Drawing Rights

(SDR) Currency Basket by end-2015

• RMB is now in transition from a trading currency to an

investment currency; the international reserve currency status

will establish eventually

16





17

Growing Use of RMB Internationally for Trade

RMB now accounts for nearly 10% of traditional trade finance flows in terms of value

Source: SWIFT

RMB as World Currency in Value for Documentary Credit Letters of Credit and Collections: Inbound + Outbound Traffic, based in value

RMB’s activity share for

Documentary Credits

increased in value from

7.32% in Jan 2013 to

9.43% in Jan2015

Majority of RMB

transactions driven by

offshore centres such as

Hong Kong, Singapore,

Macau, and Taiwan

18

Surge in RMB Payments in the International Markets

According to SWIFT, 50 of the 161 countries with exchanged payments with China and

Hong Kong are now seeing 10% or more of the flows denominated in RMB

Indonesia’s RMB usage in payments rose 175% since Apr2013

Indonesia, one of the countries contributing to RMB’s growth

Countries % Growth

Since Apr 2013

Germany +151%

Canada +346%

Sweden +1050%

Indonesia +175%

Australia +61%

Malaysia +48%

International Payments Flows Sent and Received with China

and Hong Kong

< 10% > 10%

Note: Countries with RMB Usage

>10% recently

19

Economic Relationship between Indonesia and China

Trade relations between Indonesia and China lays a solid foundation for further

development of RMB business in Indonesia

China is Indonesia’s largest import and fifth largest export market

Indonesia is the fourth largest trading partner of China within the ASEAN countries

The trade surplus will help Indonesia build up a sizable RMB liquidity pool

The economic integration between the two countries intensified in the past decade

Bilateral trade between Indonesia and China

(Million USD)

(2000)

(1000)

0

1000

2000

3000

4000

20

00-0

1

20

00-0

9

20

01-0

5

20

02-0

1

20

02-0

9

20

03-0

5

20

04-0

1

20

04-0

9

20

05-0

5

20

06-0

1

20

06-0

9

20

07-0

5

20

08-0

1

20

08-0

9

20

09-0

5

20

10-0

1

20

10-0

9

20

11-0

5

20

12-0

1

20

12-0

9

20

13-0

5

20

14-0

1

Tradesurplus

Export2013 Trade Surplus:

US$ 5469 million

Source: MOFCOM, CEIC, BOC Research

China’s “One Belt, One Road” Strategy

Source: Barclays Research Jakarta

20

Implications of Offshore RMB Business to Indonesian Firms

Indonesian firms set to benefit from the use of RMB in settlements

For an Indonesian company that exports to China

Conducting trade settlements in RMB means receiving payments in a stable currency with lower

volatility and opportunities for diversified investments in RMB assets

For an Indonesian company that imports from China

Making payments in RMB may increase its bargaining power and negotiate for better pricing

terms

For companies with strong trade relationships in China and with revenue and

expenses in RMB

Using RMB in trade settlements create a natural hedge to currency risk with the benefits of

avoiding conversion costs

For multi-national companies with investment in China

Using RMB as settling currency will facilitate smooth implementation of their projects and

eliminate foreign exchange exposure

21

Hong Kong – Offshore Clearing Centre to Facilitate Worldwide RMB Payments

China

via RTGS via RTGS

Hong Kong

PB (D) PB (E) PB (F)

via RTGS via RTGS

Overseas Regions

PB (A) PB (B) PB (C)

via RTGS via RTGS

China National Advanced

Payment System

via

CNAPS

Offshore Market Onshore Market

CNAPS =

PB = Participating Bank

Simple but efficient RMB clearing model

BOCHK

(RMB Clearing Bank)

RTGS = Real Time Gross Settlement

22

Case Study: RMB Trade Settlement Process

• Indonesian companies can make RMB payments to or receive RMB payments from their

trade counterparties in Mainland China through a participating bank (BOC Jakarta Branch)

• RMB can be purchased or RMB credit can be obtained from local banks that provide RMB

services, when necessary

• The RMB proceeds can be deposited with a local bank, invested in a wide range of RMB

financial products or converted into other currencies

Indonesian

Company

Participating Bank

(BOC Jakarta Branch) Banks in China

A company

in China Import goods from China

RMB Exchange

Via RMB RTGS Via CNAPS

Real-time clearing

Export goods to China

Receive payments

in RMB

Receive payments

in RMB RMB Remittance

23

The Established Offshore RMB Market

Offshore circulation of RMB funds takes initiative

Development of cross-

border RMB trade

settlement and investment

Enlarged offshore RMB

liquidity pool

Diversified RMB-based

products and further

development of RMB asset

management

Sufficient funds to support

RMB financing activities,

e.g. loans, bonds

RMB Internationalization

Accelerates

24

RMB Solutions and World-Class Excellence

Global Presence

The most internationalized bank

in China

More than 600 overseas entities

in 40 countries or regions

Established RMB Clearing Network

7 RMB clearing banks designated

by PBoC

More than 1000 RMB clearing

accounts, covering 80+ countries in

5 continents

Initiatives and Innovations

Launched first cross-border

RMB trade settlement deal, first

share dividend remittance from

mainland to HK, first RMB FDI,

etc

Underwrote first offshore RMB

corporate bond and first RMB

IPO

Diversified RMB Products

RMB deposits and Loans

RMB trade settlement and finance

RMB exchange and remittance

RMB bonds and IPOs

RMB derivative products

And more…

Sound Trade Finance Business

Awarded ”Best Trade Finance

Bank in China” by various

organizations for years

Full range of trade settlement

products and services

Comprehensive Understanding

Dedicated professional team

Affluent customer base in China

and overseas

Effective communication with

regulatory authorities

25

Disclaimer

Products and services described in this presentation and any associated material (collectively, the “Materials”) provided by Bank of China (Hong Kong) Limited, its

subsidiaries, affiliates or group companies (collectively, “BOCHK Group”), may not be suitable for persons in all jurisdictions.

The information contained in the Materials is for your general reference only and is provided without warranty of any kind and may be changed at any time without

prior notice. Persons in receipt of the Materials should consult their own professional advisers before making any investment decision to purchase any securities or

financial products. It is not possible for the Materials to disclose all risks and significant aspects associated with the products and services described herein. No

person should deal in any such securities or financial products or avail themselves to BOCHK Group’s investment services unless he understands the nature of the

relevant transactions and the extent of his exposure to potential loss.

Each prospective investor should consider carefully whether the products and investments are suitable for him in light of his circumstances and financial position.

None of the Materials constitutes an offer of any securities for sale or solicitation of an offer to sell any securities in the United States or any other jurisdiction in which

such offer or sale is prohibited. The financial products and services referred to in the Materials, have not been and will not be registered under the U.S. Securities

Act of 1933, as amended (the "Securities Act”), and no such securities may be offered or sold in the United States unless registered under the Securities Act or

pursuant to an exemption from such registration. The products may not be at any time offered, sold, transferred, delivered, exchanged, exercised or redeemed

within the United States or to, or for the account or benefit of, any U.S. person (as defined in the Securities Act or the U.S. Internal Revenue Code of 1986, as

amended).

No invitation is made in the Materials or the information contained herein to enter into, or offer to enter into, any agreement to purchase, acquire, dispose of,

subscribe for any securities, and no offer is made of any shares in or debentures of a company for purchase or subscription, except as permitted under the laws of

Hong Kong.

You should note that information in the Materials is reflective of data as of the specified date and is based on current assumptions and market conditions. All

estimates and opinions, if any, included in the Materials may be subject to change without notice and past performance is not indicative of future results.

Although information in the Materials has been prepared in good faith from sources believed to be reliable, BOCHK Group does not represent or warrant its accuracy,

truthfulness and completeness. None of BOCHK Group or its representatives shall have any responsibility or liability whatsoever (for negligence or otherwise) for

any loss howsoever arising from any use of the Materials or its contents or otherwise arising in connection with the Materials.

To the extent that the financial products described in the Materials are listed in Hong Kong, they are neither endorsed, issued, sold nor promoted by The Stock

Exchange of Hong Kong Limited. The Stock Exchange of Hong Kong Limited expressly disclaims any liability for any loss howsoever arising from or in reliance upon

the whole or any part of the contents of the Materials.

26

Disclaimer

From time to time, and in the ordinary course of business, members of the BOCHK Group may provide advisory and investment or commercial banking services,

and enter into other commercial transactions related to products described in the Materials, for which customary compensation has been received. Prospective

investors should make enquiries with their respective brokers as to the terms and/or existence of any such commission arrangements. For example, at any time,

member(s) of the BOCHK Group may act as a distributor or market-maker or otherwise be long or short of or have financial interests in services/products

described in the Materials.

In making an investment decision or availing yourself of the services described in the Materials, you are deemed to represent that you have made your investment

and trading decisions (including decisions with regard to the suitability of the products) based upon your own judgment and not in reliance upon any view

expressed by us and that you fully understand all the risks involved and are capable of assuming and willing to assume such risks. BOCHK Group does not make

any representation regarding the legality of investments described in the Materials under any applicable laws.

The Materials are protected by copyright. No part of it may be modified, reproduced, transmitted and distributed in any form for use without BOCHK Group’s prior

written consent.

If the presentation materials fall within the definition of “investment research” under Paragraph 16.2 (f) of the Code of Conduct for Persons Licensed by or

Registered with the Securities and Futures Commission, we shall make disclosure in the form set out in “Disclosure for Research Report and Presentation”.

“Investment research” includes documentation containing any one of the following:-

(i) result of investment analysis of securities;

(ii) investment analysis of factors likely to influence the future performance of securities, not including any analysis on macro economic or strategic issue; or

(iii) advice or recommendation based on any of the foregoing result or investment analysis.

27

Terima Kasih!

Economy & Finance

Growing your offshore RMB business