Offshore RMB Express - Bank of China...Market Review Offshore RMB Express 1 I. China-US trade talk...
Transcript of Offshore RMB Express - Bank of China...Market Review Offshore RMB Express 1 I. China-US trade talk...
Offshore RMBExpress
Issue 70 ‧Dec 2019
Contents
Part 3
Part 4
Part 1
Special Topic
Chart Book
Market Review
Part 2 Policy and Peers Updates 5
7
1
Editors:Annie CheungTel :+852 2826 6192Email : [email protected]
Sharon TsangTel :+852 2826 6763Email: [email protected]
Leo SunTel:+ 852 2826 6586 Email: [email protected]
10
Market Review
Offshore RMB Express 1
I. China-US trade talk stalled in thefirst stage, CNH hovering between 7and 7.03
On November 8, the market rumored
that China and the US agreed to roll back
tariffs in the first phase of the trade
agreement. CNH rose to 6.97 in response.
Trump subsequently stated that tariff roll
back was not included in the agreement, and
CNH fell below 7 again. Subsequently, trade
talks were in stalemate, with CNH hovering
between 7 and 7.03. As of November 29, the
central parity rate of RMB against the US
dollar was 7.029, up 0.3% from the previous
month; CNH closed at 7.0328, up 0.2% from
the previous month, and down 2.2% from the
beginning of the year; CNY closed at 7.0326,
up 0.1% from the previous month, and down
by 2.1% from the beginning of the year.
In terms of CNH HIBOR, on November
29, the O/N, 1-week, and 3-month CNH
HIBOR rates were 2.696%, 2.977% and
3.422%, respectively.
In November, CNH fluctuated between 6.97 and 7.03. On November 8, the market
rumored that China and the US agreed to gradually roll back tariffs in the first phase of the
trade agreement. CNH rose to 6.97 in response. Trump announced shortly afterwards that the
tariff roll back was not included in the agreement, and CNH fell below 7 and fluctuated between
7 and 7.03. Bond Connect trading volume continued to rise, breaking the monthly transaction
record again, with an average daily trading volume of RMB 17.9 billion. Foreign investors
purchased a net of RMB 11.7 billion. On November 7, the People's Bank of China successfully
issued two batches of RMB bills in Hong Kong, totaling RMB 30 billion.
Offshore RMB Market Developed Steadily
Market Review
Offshore RMB Express2
II. Offshore RMB businessindicators remained stable
By the end of October 2019, RMB
deposits in Hong Kong amounted to RMB
636.4 billion, up by 2.1% MoM and up by
3.1% YoY. RMB loans outstanding in Hong
Kong were RMB 150.2 billion, up by 6.2%
MoM and 23.6% YoY. The total remittance of
RMB for cross-border trade settlement was
RMB 429.4 billion, down by 6.3% MoM and
up by 27.9% YoY. RTGS turnover was RMB
21.9 trillion in November 2019, up by 5.9%
MoM. As of November2019, dim sum bond
issuance amounted to RMB 157.6 billion. As
for other offshore RMB markets, RMB
deposits in Taiwan totaled RMB 259.8 billion
(including negotiable certificates of deposit)
as of October 2019, down by 2.0% MoM.
According to SWIFT, RMB was the sixth
most actively used currency for domestic and
international payments by value in October
2019 with a share of 1.65%, down from
1.95% in September. RMB trailed behind the
following currencies: USD, EUR, GBP, JPY,
and CAD. RMB payments value decreased
by 12.3% compared to the previous month,
while other payment currencies increased by
4.2% in general.
III. Trading volume of Bond Connectcontinued to growIV.
In November, Bond Connect saw the
fastest growth in international client adoption
with 154 investors joining the Bond Connect
community, which now consists of 1,533
institutional investors. Bond Connect broke
record highs in monthly trading volume at
RMB 375.6 billion. The average daily
turnover was RMB 17.9 billion. Global
investors contributed to net purchase flow of
RMB 11.7 billion. Policy financial bonds,
Chinese government bonds, and NCDs
remained the focus of investors with turnover
of RMB 203.9 billion, RMB 113.2 billion, and
RMB 50.9 billion respectively, accounting for
54.3%, 30.1%, and 13.5% of monthly trading
volume. In terms of tenor, bonds with
maturity from 7 to 10 years remained the
most popular, taking up 44.4% of total
activities.
Market Review
Offshore RMB Express 3
IV. The People's Bank of Chinaissued two batches of RMB bills
On November 7, the People's Bank of
China successfully issued two batches of
RMB bills in Hong Kong, totaling RMB 30
billion, including RMB 20 billion 3-month bills
and RMB 10 billion 1-year bills, both pricing
at 2.9%. The People's Bank of China stated
that the issuance was welcomed by the
market. The total amount of bids exceeded
RMB 64 billion, which was 2.1 times the
amount of issuance. The subscription entities
included commercial banks, central banks,
international financial organizations, funds
and other offshore market investors from
Europe, the US, Asia and other countries
and regions.
Since November 2018, the central bank
has issued 13 batches of RMB bills totaling
RMB 160 billion. The term structure has also
expanded from 3-month and 1-year to new
tenors at 1-month and 6-month.
6
Policy and Peers Updates
Offshore RMB Express 5
The latest Greater Bay Area developmentmeasures will further promote cross-borderfinancing services
On November 6, the Leading Group for the Development of the Guangdong-Hong
Kong-Macao Greater Bay Area announced 16 measures that benefit the people of Hong
Kong, facilitating the convenient flow of people, goods and capital within the Greater Bay
Area. In particular, measures related to financial service industry are: 1. Support the use of
mobile electronic payment by Hong Kong residents in the Mainland; 2. Banks in Mainland
can open Types II or III Mainland personal bank accounts for Hong Kong residents remotely
by attestation, through their branches or holding entities in Hong Kong; 3. It is set to explore
the establishment of a two-way wealth management connect mechanism in a risk-controlled
manner with appropriate investor protection.
PBOC issued RMB bills in Hong Kong
On November 7, PBOC issued RMB bills through the Central Money Markets Unit of
the Hong Kong Monetary Authority. The issuance included RMB 20 billion 3-month bills and
RMB 10 billion 1-year bills, both priced at 2.9%.
MSCI announced the results of the November 2019 Semi-Annual Index Review on
November 7, and all changes will be implemented as of the close on November 26.
According to the statement, MSCI will implement the third step of the previously
announced weight increase of China A shares in indexes. 204 China A share stocks, 189
of which are mid caps, will be added to the MSCI China Index and the inclusion factor for
268 existing constituents will be increased from 15% to 20%. China A shares will have
weights of 12.1% and 4.1% in the MSCI China and MSCI Emerging Markets Indexes,
respectively.
MSCI further increased weight of China A shares in indexes
Special Topics
Offshore RMB Express
Mixed signals from RMB derivatives
Risk reversal on the offshore RMB
reflects the excess demand (as measured by
the difference in implied volatility) for call
options on USDCNH relative to put options
with the same delta and expiration date.
Since call options on the USDCNH reflects a
bearish sentiment on the RMB, a high level
of risk reversal signals high tail risk for the
RMB. As seen in the 3-months 25 delta risk
reversal chart below, the demand for option
market participants to short the RMB is much
weaker than during the height of trade
tensions at the beginnings of May and
August.
Weighing RMB with Derivatives
7
At the time of this writing (November 20th, 2019), more than five weeks havepassed since a phase one trade deal between US and China was announced onOctober 11th. However, due to the cancellation of the November 16-17th APECmeeting in Chile, and disagreements over whether previously imposed tariffs could berolled back before any fulfillment of trade agreements, an official deal has not beensigned. Consequently, USDCNY has been range-bound between 7.04 and 6.97 inNovember. To try to get a glimpse of market consensus for the near future, we trackreal-time views from the offshore derivatives market, which tends to be more forward-looking than the onshore market. Given the unpredictability of political outcomes suchas trade negotiations, we also estimate the RMB at various tariff scenarios to estimatethe range of RMB tail risk.
David Zhang, Senior Economist
Special Topic
Offshore RMB Express8
While the directional bias of option
market participants is relatively low, the
uncertainty around the short-term RMB
outlook has edged up since November 12th,
when President Trump threatened to
increase tariffs “substantially” if no deal is
signed. As seen in the implied volatility term
structure chart below, 1-week implied
volatility for USDCNH went up to 5% on
November 18th from 4% on November 4th,
which was the day before news about China
asking for a rollback of Sep 1st tariffs came
out. While such a move is significant given
that the annualized volatility of USDCNY in
2019 YTD was only about 3%, current
anticipation of near-term volatility is far below
the 8-9% level seen on October 11th, when
news of a phase one deal was released.
Relative to the options market, bearish
sentiment in the forward market is less
pronounced at the moment. Market
sentiment is better gauged by the difference
between offshore and onshore forward points
for two reasons. First, forward points by
themselves also reflect changes in relative
interest rates as implied by interest rate
parity. Second, the offshore market is more
forward looking than the onshore market. As
seen in the offshore – onshore 3M forward
points vs. spot chart below, the bearish
sentiment of the offshore forward market
relative to the onshore market is low relative
to the beginning of May and August.
However, the bearish level did jump from
zero to 45 after Trump’s threat to raise tariffs
“substantially” on November 12th.
Special Topic
Offshore RMB Express 9
Estimating RMB at various tariffscenarios
There are two caveats behind the
estimation of RMB at various tariff scenarios.
First, there’s tremendous uncertainty behind
the probability of each scenario. Second,
estimated RMB levels could be more or less
due to second order effects on trade route
diversion and speculation. At the present
moment (November 20th, 2019), our
baseline tariff scenario is that tariffs planned
for December 15th are suspended, but
there’s no immediate rollback of previously
imposed tariffs. Under this scenario, the
USDCNY spot is likely to hover around 7.03,
which was the price that preceded the
November 4th news of China asking for a
rollback of imposed tariffs. RMB levels for
other trade scenarios could be estimated
based on the proportion of tariffed amounts
relative to China’s total annual exports of
USD 2,500 billion. For example, in the bullish
scenario, if 15% tariffs on USD 110 billion is
removed, then the RMB may appreciate by
0.7% (0.15*110/2500).
The more likely scenarios show that the
RMB could be confined to a 2% range
immediately after phase one trade
negotiations conclude. However, an estimate
of the most extreme scenarios shows that
the RMB could move within a 9% range. Our
most bullish scenario is unlikely in the short-
term given that the Trump Administration
would have to rely on the rollback of
significant tariffs as a deal enforcement
mechanism. However, it is still useful to
gauge how much the RMB may appreciate
by when trade relations normalize. On the
other hand, the most bearish scenario of
imposing 45% tariffs on all of China’s annual
exports to the US could be what President
Trump meant by “substantially raise those
tariffs” on November 12th at the Economic
Club of New York, given that he made such a
proposal during an interview with “The New
York Times” in January 2016. However, it is
November 2019 and the US presidential
election is less than a year away, so such a
most bearish scenario may be even less
likely than our most bullish scenario.
Chart Book
Offshore RMB Express10
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(%, 29 Nov 2019) FTSE-BOCHK Offshore RMB Bond Composite Index
Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: BOCHK Global Market estimate
133.8
100
105
110
115
120
125
130
135
140
13/0
113
/07
14/0
114
/07
15/0
115
/07
16/0
116
/07
17/0
117
/07
18/0
118
/07
19/0
119
/07
End of Nov:
(5.0000)
0.0000
5.0000
10.0000
15.0000
20.0000
01/16 07/16 01/17 07/17 01/18 07/18 01/19 07/19
overnight 1-week 3-month
overnight 2.6962%1-week 2.9768%
3-month 3.4220%
End of Nov:
Chart Book
Offshore RMB Express12
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
October 2016 October 201940.55%USD#1
EUR 32.26%#2
GBP 7.61%#3
JPY 3.38%#4
1.73%CAD
EUR 33.56%#2
GBP 7.00%#3
JPY 3.64%#4
#51.82%#5 CAD
CNY#6 1.67%
USD#1 40.64%
1.65%#6AUD
CNY#7 1.63%
HKD#8 1.33%
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.
Please follow BOCHK Research on WeChat for the latest economic and financial markets analyses