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Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2012 research.standardchartered.com
Kelvin Lau, +852 3983 8565
David Mann, +1 646 845 1279
Marios Maratheftis, +971 4 508 3311
Sophii Weng, +1 212 667 0472
| Global Research | 00:01 GMT 14 November 2012 |
CNH – Introducing the Renminbi Globalisation Index
We launch the Standard Chartered RGI, which tracks the Renminbi’s level of globalisation
We also introduce our Offshore Renminbi Corporate Survey of local and global corporates
As the CNY heads towards global reserve currency status, its broader use as a trade currency will be key
Our measure of internationalisation has risen more than seven-fold since end-2010
Singapore and London now each account for just over 10% of the RGI universe; Taiwan is next
Our first Offshore Renminbi Corporate Survey shows strong appetite for offshore Renminbi activity
China‟s re-entry into the global economy was arguably the most important economic
development of the past 30 years. One of the next major steps for China as it
redefines its position in the world economy will be the emergence of the Chinese
yuan (CNY) as a dominant currency in international trade and as a reserve currency.
In this regard, rapidly increasing use of CNY for trade settlement and exponential
growth in the offshore Renminbi (CNH) market are important milestones.
We have developed a new index to measure the extent of Renminbi internationalisation:
the Standard Chartered Renminbi Globalisation Index (RGI). This index will allow us to
track the ups and downs in the internationalisation process. We also introduce a
comprehensive survey of local and global corporates that will help us to track the
motives for, and next steps in, using the Renminbi offshore. We find a strong appetite
among survey respondents to use the CNH market for China-related business. We will
publish updates of the survey results quarterly and of the RGI once a month. Ultimately,
we expect use of the CNH to reach a level to rival other reserve currencies.
This report is divided in three parts. Part I discusses the characteristics of major
reserve currencies in history and compares them to the CNY today. Part II introduces
the Standard Chartered RGI and the corporate survey, while Part III analyses their
results. The Appendix provides technical details on how the RGI is constructed.
Figure 1: The RGI has grown more than seven-fold since December 2010
Note 1: An index base of 100 was set for Dec-2010, initially covering Hong Kong only
Note 2: Singapore and London became Eligible Markets and were added to the RGI in Aug-2012
Note 3: Brief pauses in the RGI uptrend in Q4-2011 and Q1-2012 reflect a period of caution and market
consolidation following late Q3-2011 market turbulence triggered by global risk aversion
Source: Standard Chartered Research
0
100
200
300
400
500
600
700
800
Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12
Index as of Sep-2012 = 735
HK HK + SG + LDN
+46%
1
2
3
On the Ground
GR12AU | 14 November 2012 2
I. Lessons from history for the CNY
Reserve currency status has many benefits (and pre-conditions)
The Renminbi‟s move towards reserve currency status could eventually lead to a
truly multi-polar world in terms of reserve currencies, away from the current
USD-dominated system. This would fundamentally alter the global financial system in
a way not seen since the start of the Bretton Woods era in 1945.
Being a country with global reserve currency status carries major benefits. First, such
a country is considered a safe haven in times of global risk aversion, even if it is the
cause of the risk aversion. Second, wide international acceptance of a country‟s
currency means it benefits from the famously described „exorbitant privilege‟ (a term
first used by France‟s Valéry Giscard d‟Estaing to describe the USD‟s role in the
global financial system in the 1960s). This means a currency is widely accepted as a
store of value in itself because other countries use it to facilitate trade. China began
to accelerate its push for Renminbi internationalisation in 2010. Over time, we expect
the Renminbi to provide an attractive alternative to the USD, and share the gains of
becoming a reserve currency status itself.
Historically, the country with the world‟s main reserve currency was usually the largest
economy at the time. It has historically also usually been the largest exporter and net
creditor. China is already the world‟s largest trading nation and a major global creditor.
However, CNH assets may not match the depth and liquidity of the USD capital
markets for a long time. Costs and ease of transactions have historically been a major
determinant of reserve currency status. China is also an interesting case because it
still has capital controls in place, even as policy makers push for greater international
use of the Renminbi. Many would argue that full capital account convertibility is
needed before the Renminbi can be taken seriously as a reserve currency.
II. The mechanics
The Standard Chartered Renminbi Globalisation Index (RGI)
Our index aims to measure overall growth in offshore Renminbi „usage‟. We count
the currency‟s use as a store of wealth, a trade settlement currency and a means of
capital raising, as well as its FX market trading volume. These are all key parts of the
internationalisation story. The RGI also helps to identify inevitable setbacks on a
promising long-term uptrend.
A detailed explanation of the methodology behind the RGI can be found in the
Appendix. Here we summarise the key characteristics that help the index capture the
CNH market‟s variety and increasing geographical scope:
The RGI is computed on a monthly basis, based on four CNH market
components with weights inversely proportional to their variance – (1) CNH
deposits, (2) trade settlement and other international payments, (3) Dim Sum
bonds and certificates of deposit (CDs) issued, and (4) FX turnover, all from an
offshore perspective and denominated in Renminbi.
We have chosen these components to represent the major areas of offshore
Renminbi activity by corporates, and also taken into account the availability,
reliability and trackability of the data.
On the Ground
GR12AU | 14 November 2012 3
Both quantitative and qualitative thresholds are in place to determine an offshore
market‟s eligibility for index inclusion. This adds scalability to our index as the
CNH continues to extend its global reach.
Location-specific data for each component is used to compute a corresponding
global aggregate. The index initially covered only Hong Kong; Singapore and
London were added in August 2011. As other centres, such as Taipei or New
York, become more significant, we will add them to the index.
The Offshore Renminbi Corporate Survey
Complementing the RGI is the launch of our first Offshore Renminbi Corporate
Survey. It is conducted independently by Asset Benchmark Research and will be
conducted on a quarterly basis. The aim is not just to gauge the change in actual
offshore Renminbi usage over the past six months, but also to measure expectations
for the next six months. While the RGI tells us where things stand now, the survey
gives us a forward-looking view, with the more qualitative questions providing added
flavour and texture. Details on the factors that would motivate respondents to
increase their offshore Renminbi use are particularly interesting.
Corporates in various locations are asked whether they are (or plan to be) involved in
six main areas of offshore Renminbi activity:
Offshore Renminbi deposits
CNY trade settlement
CNH FX transactions
Dim Sum bond issuance
CNH loans
Portfolio investments in Renminbi
Top managers of companies in 16 locations were interviewed for our first survey,
conducted between mid-October and early November. Respondents comprise a mix
of multinationals and companies with a more local/regional focus. They are generally
chosen for the survey because they are likely offshore Renminbi users. Figures 2
and 3 show the breakdown of respondents, by location and by the number of
offshore Renminbi product types they use (current versus potential).
Figure 2: Respondent locations
% of respondents
Figure 3: A tendency to use more products
% of respondents
No. of additional products respondents may use in
6 months’ time
No. of CNH products currently using
0 1 2 3 4 5 6
0 23.66% 5.34% 1.53% 3.05% 3.05% 1.53% 0.76%
1 4.58% 5.34% 1.53% 0.76%
2 8.40% 5.34% 3.82% 0.76%
3 9.16% 4.58% 1.53% 1.53%
4 8.40% 2.29% 0.76%
5 1.53% 0.76%
6
* Including those in mainland China;
Sources: Asset Benchmark Research, Standard Chartered Research
Sources: Asset Benchmark Research, Standard Chartered Research
51%
35%
14%
Hong Kong Rest of Asia * Europe
On the Ground
GR12AU | 14 November 2012 4
Both the Standard Chartered RGI and the survey will become an integral part of
The Renminbi Insider – our bi-monthly flagship report covering on- and offshore
Renminbi macro and market developments. The next survey will be conducted in
February 2013. We will continue to expand the number of respondents and
geographical locations covered by the survey.
III. The results
The RGI – Recovery in all areas but deposits Figure 1 on the front page shows the RGI going back to December 2010, at which
point a base of 100 was set. This is a natural starting point. In H2-2010 the Renminbi
was first being allowed to trade freely on a strictly offshore basis for non-trade-related
purposes (which led to different onshore and offshore pricing, or CNY and CNH), and
offshore Renminbi business was allowed to be developed freely as long as it does
not involve the flow of Renminbi back into mainland China (non-trade cross-border
Renminbi remittances are subject to quotas or case-by-case approval). The birth of
CNH trading incentivised corporates to switch to Renminbi trade settlement, which
boosted Renminbi deposits and, in turn, supported Dim Sum bond issuance.
It is therefore unsurprising to us that, in a little less than two years since December
2010, the RGI has grown more than seven times in size, and now stands at a reading
of 735. Below are more of our observations on the RGI:
The „pause‟ in the uptrend in Q4-2011 and Q1-2012 reflected the setback in the
CNH market then. This sell-off took place in September 2011, when the global
financial markets were still reeling from the escalating European sovereign debt
crisis. Growth expectations were scaled back on a global scale, led not only by
the US and Europe, but also by mainland China. The CNH and Dim Sum bonds,
which were among the last markets to succumb to risk aversion, sold off along
with the rest of the Asian FX and credit universe. This left many investors
shaken, and offshore Renminbi activity slowed markedly across all four of our
index components in the subsequent months.
While Renminbi deposits in Hong Kong have yet to return to pre-shock levels,
the recovery in the RGI has been impressive, driven by a swift rebound in all
three of the other index components. As of September 2012, the index was 46%
higher than its previous „peak‟ in Q4-2011. This is in line with our long-standing
view that, looking beyond the deposit accumulation story, there is plenty of
momentum behind further CNH market growth.
We believe the stalling of Renminbi deposit growth in Hong Kong year-to-date
has been driven by a combination of (1) more balanced import and export flows
denominated in Renminbi; (2) the absence of CNY appreciation expectations;
(3) the creation of new channels, such as R-QFII, to bring money back into
China; and (4) leakage to other emerging Renminbi financial centres. While the
days of exponential deposit growth in Hong Kong are likely to be difficult to
repeat (barring further major policy liberalisation), we believe Hong Kong
deposits are well supported by now-elevated CNH interest rates driven by bank
competition. The likely resumption of CNY appreciation in 2013 should also help.
More offshore users will also mean more accounts are opened.
The expansion of the CNH‟s geographical reach has also helped to boost the
RGI‟s performance over the past year. Both Singapore and London met the
On the Ground
GR12AU | 14 November 2012 5
index entry requirements in August 2011, and have since been contributing to
headline RGI growth. They have so far been neck-and-neck in the race to
become the next big offshore Renminbi financial centre. As of September,
excluding Dim Sum bonds (which are global in nature and should not be
associated with a particular location), the ratio of the relative sizes of Hong
Kong, Singapore and London was 78:12:10.
Looking ahead, there are a few things to keep an eye out for:
Month-on-month growth in the RGI has slowed over the past several months, to
1.9% in September from 4.4% in August and 6.9% in July (Figure 4). This
moderation has been broad-based. This could be a result of the downward
adjustment in global growth expectations (led by China) in Q3-2012, and the
subsequent hit to global sentiment. Over time, as the nominal base grows larger,
double-digit month-on-month growth rates could be difficult to repeat. But for
now, our expectation is that the bottoming of China‟s economy and a gradual
recovery in 2013 will bring new impetus to the index.
Both London and Singapore are looking to shift up a gear in their race to outdo
each other. The second Hong Kong-London Forum, a private sector-led
co-operation initiative between the two cities aimed at jointly promoting CNH
business and developing CNH capabilities, will be held in London in early
December. Singapore, meanwhile, recently issued full banking licences to two
Chinese lenders, a move widely seen as paving the way for the establishment of
a Renminbi clearing bank soon.
Taiwan is set to have a CNY clearing bank before Singapore, possibly before
end-2012, after the signing of a Memorandum of Understanding by the central
banks on both sides of the Taiwan straits in late August. As outlined in our latest
Renminbi Insider report, we expect the extension of Renminbi business to
Taiwan‟s Domestic Banking Units (DBUs) from Offshore Banking Units (OBUs)
to lead to a surge in Renminbi activity in Taipei. For example, Renminbi deposits
in Taiwan are set to surge to CNY 150bn by end-2013, in our view, from CNY
18bn as of September 2012 (Figure 5). We project that Taipei will qualify for RGI
inclusion as early as H1-2013; when that happens, the pie will get bigger.
Figure 4: Not immune to the global slowdown
Change in RGI, % m/m
Figure 5: Taipei is next in line to join the RGI
Renminbi deposits in Taiwan OBU accounts, CNY bn
Source: Standard Chartered Research Sources: CBC, Standard Chartered Research
-5%
0%
5%
10%
15%
20%
25%
30%
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
0
2
4
6
8
10
12
14
16
18
20
Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12
On the Ground
GR12AU | 14 November 2012 6
The Renminbi offshore survey results
Our inaugural survey results confirm strong underlying growth momentum over the
past six months across the key CNH products (Figure 7). They also provide a
forward-looking view suggesting that the GRI is likely to remain on an uptrend in the
next six months (Figure 8). We summarise other key observations below.
76% of our respondents are either conducting business in at least one of the six
areas of offshore Renminbi activity we asked about, or may consider doing so
over the next six months (Figure 3).
Existing offshore Renminbi users are more willing to expand their usage, with
48% saying they may start to use one or more of the offshore Renminbi products
they are not currently using in the next six months. This contrasts with only 39%
for current non-users (Figure 3).
The most common offshore use of Renminbi is for FX transactions (by almost
half of our respondents, or 60% if one includes potential users), driven by
hedging needs (Figures 6 and 10).
For Renminbi trade settlement, potential users are mainly eyeing the benefits of
better FX risk management, while a higher share of existing users appreciate the
improvement in timeliness or are doing so at the request of onshore counterparts
(Figure 9).
According to the survey responses, the two main drivers of Dim Sum bond
issuance are the lower cost of funds and the expansion of financing channels;
more than half of the relevant respondents said they will use the proceeds to
make investments onshore (Figures 11 and 12).
The need to fund investment in, and finance trade with, China is set to drive
future growth in CNH loans (Figure 13).
We also had the opportunity to conduct one-on-one interviews with some of our
respondents. Below are key takeaways and quotes:
On the question “What qualities do you look for in a Renminbi offshore financial
centre?”, answers ranged included liquidity, stability, China‟s backing, genuine
currency need (as opposed to speculation), system efficiency, risk management,
infrastructure and network.
Figure 6: CNH FX is the most widely used product
Current and potential users (% of respondents)
Sources: Asset Benchmark Research, Standard Chartered Research
33 36
48
22
8 10
17 18
12
17
11 10
0
10
20
30
40
50
60
70
Deposit Trade FX Loans Bond … Investment
Using now
May use in next 6 months
On the Ground
GR12AU | 14 November 2012 7
“I think the necessary quality for a Renminbi centre should include first of all a lot
of people actually holding sufficient deposits.”
– Company A (Hong Kong corporate).
“A lot of participation from the users will create a better market.”
–Company B (Hong Kong corporate).
Answers to the question “What are the key challenges to using RMB offshore?”
included pricing, currency fluctuation, scepticism towards the system,
operational procedures for settlement, limited usage of CNH offshore, and
cumbersome regulatory and administrative requirements.
“The key challenges are risk in currency exchange management and the
procedure for the settlement – operational procedure, whether it’s efficient, is
also very important to us.”
– Company C (Multinational corporate in Hong Kong and headquartered in
Japan)
“Not sure – this is something we are still just exploring.”
– Company D (multinational corporate in Singapore, headquartered in the US,
already using four of the six main Renminbi products)
We also asked a question specifically targeting multinationals: “Was it difficult to
convince your headquarters to do Renminbi business in [respondent‟s
location]?” None of the relevant respondents indicated any difficulty per se. One
(headquartered in mainland China) is already managing its FX out of Hong Kong
anyway, while another mentioned that a bit of persuasion was needed – see
below.
“We shouldn’t use the word difficult. We have to prove to them how viable and
feasible it could be to do RMB business. Because for our customers – they didn’t
have any special requests for us to trade in RMB currency.”
– Company C
On the Ground
GR12AU | 14 November 2012 8
IV. Future enhancements
Incorporating ‘ease of use’
We will continue to look for ways to improve the RGI index to make it even more
representative of the necessary conditions to become a reserve currency. The
forward-looking components of our survey provide useful insights into this. One
message from both the academic literature and market participants is that „ease of
use‟ is paramount in a reserve currency. It is difficult to see companies choosing to
use a currency in which it is more costly to transact. This is directly linked to the
breadth and depth of the market and to regulatory constraints. We will look for a way
to measure this in a sub-index that could be added to the RGI.
We will also build a benchmark against which to compare the RGI. The most logical
comparison would be to current reserve currencies; the GBP and USD are the best
examples. This is not immediately needed, however, given that the Renminbi is still
far from achieving reserve currency status on many of the key metrics.
About Asset Benchmark Research
Asset Benchmark Research conducts in-depth, product-specific surveys in Asia's
financial markets. Part of the group that publishes The Asset magazine, the research
team specialises in accessing senior corporate decision-makers and institutional
investors to provide accurate quantitative and qualitative data to assist in
management decisions.
On the Ground
GR12AU | 14 November 2012 9
Appendix: Standard Chartered RGI methodology
Index computation and components
Four parameters were chosen for the calculation of the Index, as they best represent
the major areas of offshore Renminbi activity by corporates. The weights of each
parameter (WD, WT, WS and WF) are inversely proportional to their variance. The
index level for each month, in respect of the immediately preceding month, is
computed in accordance with the following formula:
where (sources in brackets):
RGI(t) means, in respect of month t, the Index level as calculated, with a base of
100 as of December 2010;
DEPO(t) means, in respect of month t, the sum of the three-month moving
average of offshore Renminbi deposits outstanding across eligible markets (local
central banks, monetary authorities, or other credible official sources, using the
latest data available if not regularly reported);
TSIP(t) means, in respect of month t, the sum of the three-month moving
average of monthly Renminbi trade settlement and other Renminbi international
payments across eligible markets (SWIFT WATCH);
DSCD(t) means, in respect of month t, the three-month moving average of
outstanding issues of Dim Sum bonds and offshore Renminbi-denominated CDs
globally (Bloomberg); and
FXTO(t) means, in respect of month t, the sum of the three-month moving
average of monthly offshore Renminbi (CNH) FX trading turnover across eligible
markets (Standard Chartered‟s own estimates).
An eligible market refers to an offshore market that has met the three main eligibility
criteria for it to be included in the index. First, data on the market needs to be
available, reliable and trackable over time. Second, an eligible market, for the month
when it is first added to the index, must have offshore Renminbi flows equal to or
larger than the size of Hong Kong‟s as of the index base year. Third, the market
needs to be widely recognised as an offshore Renminbi centre, or have the potential
to become one.
On the Ground
GR12AU | 14 November 2012 10
Figure 7: Change in usage over the past six months
% of respondents
Figure 8: Expected change in usage in the next six months
% of respondents
Sources: Asset Benchmark Research, Standard Chartered Research Sources: Asset Benchmark Research, Standard Chartered Research
Increase Same Decrease
0% 20% 40% 60% 80% 100%
Deposit
Trade
FX
Increase Same Decrease
0% 20% 40% 60% 80% 100%
Deposit
Trade
FX
Figure 9: FX risk management drives RMB invoicing
Factors driving corporates’ use of RMB trade settlement
Figure 10: Hedging is the main purpose for FX use
Main purpose of CNH FX transactions (% of respondents)
Sources: Asset Benchmark Research, Standard Chartered Research Sources: Asset Benchmark Research, Standard Chartered Research
Figure 11: Lower costs, diversification of financing tools
Motivations for considering RMB bond issuance
Figure 12: Investment in China is the main driver
Uses for funds raised via CNH bonds (% of respondents)
Sources: Asset Benchmark Research, Standard Chartered Research Sources: Asset Benchmark Research, Standard Chartered Research
0%
20%
40%
60%
80%
100%
Current user Potential user
Others
Requested by China counterparts Improved timelines
Mandated by parent
improved access to China buyers / suppliers Better manage interest rate risk Cost savings
Improved trems of trade
Better manage FX risk
Potential users
Current users
0% 20% 40% 60% 80% 100%
Alpha-/yield-seeking
Other
Hedging
43.5% 43.5%
8.7%
4.3%
Expand financing channels
Lower cost of funds
Build international profile
Hedging
52%
25%
15%
4% 4%
Investment in China
Offshore working capital
Swap into other currency
Replace onshore WC
loans
Refinance RMB loan in China
On the Ground
GR12AU | 14 November 2012 11
Figure 13: China-related business is the main driver of loans
Main purpose of CNH loans (% of respondents)
Figure 14: Most respondents are positive on CNH loans
Actual change in amount, last 6M vs. expectations of next 6M
Sources: Asset Benchmark Research, Standard Chartered Research Sources: Asset Benchmark Research, Standard Chartered Research
Current users
Potential users
0% 20% 40% 60%
Other
Swap into other currency
Financing trade with China
Investment in China
38.46% 30.77%
46.15%
46.15%
15.38% 23.08%
0%
20%
40%
60%
80%
100%
Loans actual change past 6mth Loans expected change next 6mth
Decrease Same Increase
On the Ground
GR12AU | 14 November 2012 12
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WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. © Copyright 2012 Standard Chartered Bank and its affiliates. All rights reserved. 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Document approved by
Marios Maratheftis Global Head of Regional Research
Data available as of
00:01 GMT 14 November 2012
Document is released at
00:01 GMT 14 November 2012