offshore rmb express€¦ · 29.4 trillion in march 2020, up by 25.7% mom. as of march 31, total...
TRANSCRIPT
Offshore RMBExpress
Issue 74 ‧April 2020
Contents
Part 3
Part 4
Part 1
Special Topic
Chart Book
Market Review
Part 2 Policy and Peers Updates 4
7
1
Editors:
Lynn ZhangTel :+852 2826 6586Email : [email protected]
Sharon TsangTel :+852 2826 6763Email: [email protected]
Matthew LeungTel:+ 852 3982 7177 Email: [email protected]
14
Market Review
Offshore RMB Express 1
I. RMB showed resilience underfinancial market turbulence
Coronavirus outbreak continued across the
globe. Massive slowdown in economic
activities led to a slump in financial markets.
The US Dollar Index (DXY) moved higher to
103, which is a multi-year high. Assets
including equities, corporate bonds, and gold
experienced sell-offs as investors switched to
risk-off mode and converted assets into USD,
pressuring the RMB exchange rate. CNH
remained weak and fell to 7.16 on March 19,
before stabilizing at 7.10 at end of March, but
was relatively stable compare to other assets.
As of March 31, the RMB’s central parity rate
against the USD closed at 7.0825, down
1.3% MoM, CNH closed at 7.0917, down
1.7% MoM, CNY closed at 7.0851, down
1.5% MoM.
The situation may further deteriorate as the
virus in Europe and the US is yet untamed.
The International Monetary Fund (IMF)
predicted a downturn in global economy,
indicating a growing chance of economic
recession. DXY is expected to remain strong
in short term, pressuring other currencies.
Although the external business environment
is becoming more uncertain, RMB showed
resilience under volatility. The degree of
depreciation was lower than Europe and
emerging markets currencies. The virus is
apparently under control in China and
economic activities could resume in Q2. Also,
Fed announcement of unlimited QE and
widened US-China interest rate spread
increased attractiveness of China bonds.
Therefore, CNH is expected to fluctuate
between 7 and 7.1 in the short to medium
Offshore RMB Market Stabilized amidst Financial Market TurbulenceCoronavirus fears remained in March and led to financial market turbulence. Risk-offconditions sent the dollar index to a multi-year high. CNH was depreciated to 7.16 inmid-March, before stabilizing at around 7.10 level. Offshore RMB major businessindicators rebounded after Chinese New Year, while the volume of cross borderpayments and settlements recorded double digit percentage points increase. BondConnect operated in a robust manner. Fed announcement of unlimited QE widened US-China interest rate spread and increased the attractiveness of RMB assets, promptingforeign institutions to increase Chinese bond holdings. RMB share of global currencyreserves was 1.96% as of Q4 2019, while the share of USD continued to decrease.
Market Review
Offshore RMB Express2
term. More news of positive developments
will increase the chance of a rebound in the
RMB exchange rate.
CNH Hibor was stable in March. As of March
31, the O/N, 1-week and 3-month CNH
HIBOR rates were 1.012%, 1.594% and
2.471%, respectively.
II. Offshore RMB major businessindicators rebounded
RMB business indicators rebounded after the
fall due to seasonal factors in February. By
the end of February, RMB deposits in Hong
Kong amounted to RMB638.7 billion, up by
4.3% MoM and up by 5.0% YoY. RMB loans
outstanding in Hong Kong were RMB159.6
billion, down by 0.9% MoM and up by 49.2%
YoY. The total remittance of RMB cross-
border trade settlements was RMB481.0
billion in February, up by 18.9% MoM and up
by 42.1% YoY. RTGS turnover was RMB
29.4 trillion in March 2020, up by 25.7% MoM.
As of March 31, total issuance of dim sum
bonds amounted to RMB43.0 billion
(including RMB40 billion central bank bills).
According to SWIFT, the RMB is the fifth
most active currency in February 2020 for
domestic and international payments by
value, with a share of 2.11%, behind USD,
EUR, GBP and JPY. RMB payments value
increased by 17.6% compared to the
previous month, while in general all
payments currencies decreased by 8.1%.
III. Foreign institutions continued toincrease China bond holdings; BondConnect maintained stable operation
The trend of foreign institutions increasing
holdings of Chinese bonds has not been
reversed by the effects of the virus. By end of
February, foreign holdings in Chinese bonds
reached RMB2.28 trillion, with a monthly net
inflow of RMB75.6 billion, with an increase of
RMB525.4 billion in total compared to
February 2019 (30% YoY). With the Fed re-
activating QE, US 10Y treasury yield
dropped from 1.9175% at end of 2019 to
0.677% March 31 2020 (quarter low at
0.5403%). The widening spread of US-China
interest rates, and further market opening-up
policies would facilitate investors increasing
holdings of China bonds.
Despite the severity of current situation,
Bond Connect has been operating in a robust
manner in March with continuous support
from offshore investors and onshore dealers.
Trading tickets totaled 5007 for the month,
while trading volume and average daily
turnover reached RMB478.2 billion and
RMB21.7 billion respectively. Policy bank
bonds, Chinese government bonds, and
Market Review
Offshore RMB Express 3
NCDs drew the most interest, accounting for
50%, 30% and 16% of the monthly trading
volume. In March, the scheme welcomed 89
new investors and expanded its coverage to
31 jurisdictions across the globe with 1,818
global institutional investors, including 70 of
the top 100 global asset management
companies.
IV. RMB accounted for 1.96% ofglobal currency reserves as of Q42019
According to the latest statistics released by
IMF on March 31, as of Q4 2019, reserves
held in RMB was US 217.67 billion, down by
USD1.95 billion since Q3 2019. RMB share
of global currency reserves was 1.96%,
slightly lower than 2.01% as of Q3 2019.
USD’s share of global reserves continued to
fall, down from 73% in 2011 to 60.9% in Q4
2019. Euro remained second with a share of
20.5%. JPY’s share increased to 5.7%, the
highest level since Q1 2001.
Policy and Peers Updates
Offshore RMB Express4
NDB Finances Emergency Loan to China with Panda Bond
On April 2nd, New Development Bank (NDB), a multilateral development bank established
by the five BRICS countries, raised Rmb5 bn (USD705 mn) from a Panda bond public
offering to help fund a Rmb7 bn emergency assistance program loan to the Chinese
provinces of Hubei, Guangdong and Henan, which will help finance increased expenditures
on public health. NDB’s deal was the first coronavirus-themed Panda bond from a
multilateral financial institution, although other multilateral institutions such as African
Development Bank and Inter-American Development Bank have recently issued
coronavirus-themed US dollar bonds. The offering attracted strong demand from both
onshore and offshore investors. Total subscriptions stood at 2.99 times the issue size.
Bond Connect scheme advanced to offer services of special settlement cycles and
recycling settlement to streamline the access of China interbank market and to cater for
trading and settlement needs of offshore investors.
Special settlement cycles allow investors across different regions in the world facing
different local holiday arrangements to settle trades on T+4 and beyond, mitigating
operational risks. Offshore investors can now apply for special settlement cycles through
the Bond Connect Backup Trading Service of BCCL, while the subsequent settlement
procedures remain consistent with the usual protocol.
Through the recycling settlement service, investors can opt for recycling settlement within
the next three business days following the original contracted settlement date by applying
to China Central Depository & Clearing Co., Ltd. (CCDC) or Shanghai Clearing House
(SHCH) should a trade fails to settle on schedule.
Bond Connect Provides Special SettlementCycles and Recycling Settlement
Policy and Peers Updates
Offshore RMB Express 5
CFETS: 9 Institutions Join Bond Connect as Market Makers
China Foreign Exchange Trade System (CFETS) news - in order to further expand the
depth and breadth of the Bond Connect, from April 8 onwards, Bond Connect market maker
panel will add 9 new members (now 56 in total): i.e. Post Savings Bank of China, Bank of
Qingdao, Bank of Dalian, Bank of Changsha, Bank of Hankou, Guosen Securities, Sealand
Securities, Shanxi Securities, and First Capital Securities.
Special Topics
Offshore RMB Express
RMB Exchange Rate Trends Amid Pandemic in Europe and the U.S.
7
International financial markets experienced a volatile quarter amidst the outbreak ofCoronavirus. In particular, since massive increase in confirmed Coronavirus cases inEurope and the US, the volatility of major international currencies and some emergingmarket currencies increased significantly. RMB exchange rate also experienced arelatively large degree of depreciation. As of March 31, CNH closed at 7.0917, down1.91% compared to the previous quarter. CNY and the RMB’s central parity rate againstthe USD closed at 7.0851 and 7.0825 respectively, down 1.56% and 1.71% compared tothe previous quarter.
Ying Jian, Senior Economist
I. Virus outbreak in Europe and theUS increased global sentiment of riskaversion
Coronavirus is one of the few black swan or
grey rhino events in recent years. It was hard
to predict the outbreak of the virus, let alone
massive spreading in one month time, with
major economies in Europe and America all
suffering from the virus. The economic
impact was also out of expectations,
disrupting normal economic activities,
creating vigorous fluctuations in global
equities, forex, bonds, and commodities, etc.
We also expect a downtrend of various
economic indicators, which would lead to
another wave of market turbulence.
The global financial market in Q1 2020 was
characterized by its significant increase in
volatility of various financial assets. US Dow
Jones index dropped 23% throughout the
quarter, with highest and lowest points at
29551 and 18592 respectively, with a 37%
adjustment at the maximum level. Nasdaq
index decreased 14% during the same period,
with maximum adjustment at 30%. Gold price
rebounded 3.6%, after a preceding sharp fall
of 11.9%. US 10-year treasury yield dropped
from 1.9175% at end of last year to 0.677%
on March 31 this year (quarter low at
0.5403%), decreasing 1.24%. Italy, which
was hit the hardest by the virus, had its 10-
year bond yield rising from 0.903% to
2.377%, up 1.474%. Due to the above, the
outbreak of Coronavirus seriously hammered
investors’ confidence, herding them toward
relatively safe assets in a risk-off market.
Special Topic
Offshore RMB Express8
Risk adverse appetite had been reflected by
the global rush into USD in the foreign
exchange market. Global currencies besides
USD depreciated, with some emerging
market currencies exchange rate seriously
hit. On March 31, the dollar index (DXY)
closed at 98.91, appreciating 2.6% compared
to the previous quarter, with the highest level
at 102.82, and maximum increase at 8.3%.
Euro and JPY depreciated 1.6% and 1.1%,
and respectively at one point depreciated
6.6% and 8.8%. AUD recorded the largest
depreciation of 18.2% in Q1 2020, RUB, BRL,
ZAR depreciated 31.0%, 27.9% and 27.3%
at maximum. Among Southeast Asia
currencies, IDR, MYR, THB saw a greater
level of adjustment, depreciating 22.3%,
9.6% and 8.9% at maximum.
II. Market sentiment posed significantimpact on the RMB exchange rate
The recent years have seen increasing
interaction between RMB exchange rates
and other currencies. After the financial crisis
and Europe debt crisis, USD became the
dominating currency, with EURO, GBP, and
JPY being left in a passive position.
Movement of RMB exchange rates was more
in tandem with EURO, GBP and JPY, thus
bearing an inverse relation with DXY.
The RMB exchange rate was affected by
both internal and external factors, including
China, Europe and the US economic
performances and monetary policies, China
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Chart 1 Dow Jones Industrial Average
Source: Bloomberg, BOCHK
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Chart 2 Crude Oil Futures
Source: Bloomberg, BOCHK
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Chart 3 The Dollar Index (DXY)Source: Bloomberg, BOCHK
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Chart 4 EUR/USD and USD/JPY
Source: Bloomberg, BOCHK
Special Topic
Offshore RMB Express 9
capital market reform, and RMB
internationalization policies, while not
glossing over the black swan or grey rhino
events. In May 2018, the US hastily
announced tariffs on China imports, and as a
result CNH depreciated 8.7% in 2 months.
The US and China started tough trade
negotiations, which then dominated the
agenda of the ensuing months. CNH rose to
6.7 when headway was made, but when
trade tensions intensified, CNH fell below 7
level and once approached 7.2. Following
the breakthrough in the trade negotiation at
the end of 2019 and the signing of the Phase
One deal on Jan 15 2020, the reduced trade
tensions have alleviated the unfavourable
impact on CNH.
However, it did not take long before the new
black swans and grey rhinos hit. In late
February, the Coronavirus broke out in some
China provinces, and China had to introduce
strict virus prevention and control measures
of unprecedented scale, impacting normal
travelling and living of citizens. During the
Chinese New Year, CNH continued trading
and saw a weakening trend, bordering below
the 7 level a few times.
Economic activities tended to deviate from
the norm during Chinese New Year holidays,
with longer lags in data reporting and wider
ranges of fluctuation. With such expectations,
the impact on RMB exchange rates would
have been limited. The less than desirable
performance of economic data between
January and February 2020 had also been
accounted for by the market. The Chinese
Government became more proactive in
financial policies and more flexible in
monetary policies, ensuring market liquidity,
and guided corporate loan interest rates
lower, stabilizing investors’ confidence.
However, the rapid outbreak of the pandemic
overseas in February caused the collapse of
international financial markets, significantly
increasing global risk aversion. With even the
safest assets such US 10-year treasuries
and gold being sold off, investors preferred to
hold cash. The Fed re-activated the
quantitative easing program (QE), introduced
a lot of unconventional policies and tools,
swapped currencies with other central banks
to increase USD liquidity. Until now, the
impact from Coronavirus outbreak has not
yet been reflected in major economic
indicators, therefore, this round of global
financial market turbulence was mainly
caused by an increase in risk aversion. CNH
depreciated sharply to 7.165 on March 19
amid external uncertainties.6.26.46.66.8
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Chart 5 USD/CNH
Source: Bloomberg, BOCHK
Special Topic
Offshore RMB Express10
III. The trend of RMB in the short termdepends on the evolution of thepandemic
With current global economic disruption and
weak stock and commodity prices, investors
remain risk averse and cram into the safety
of U.S. government bonds. The yield on the
benchmark 10-year Treasury note reaches
0.582% on April 1. This market situation may
continue for some time for reasons below:
First, the Covid-19 outbreak in Europe
and America has not been effectively
controlled, and the possibility of further
deterioration cannot be ruled out. The
number of confirmed cases worldwide
exceeded 920,000 by April 1, with major
European and American countries
accounting for three quarters. There were
46,000 deaths, with 80% from major
European and American countries. The
stormy clouds of this pandemic still hang
heavily over the Europe. Trump said that
keeping U.S. Covid-19 deaths under 100,000
would be a ‘very good job’. Some experts
predict that a final U.S. coronavirus death toll
would be somewhere around 200,000.
According to this, the number of confirmed
cases could reach one to two million. In the
worst scenario, it would be difficult to
estimate the damage worldwide, and
unprecedented volatility in the market will be
inevitable.
Second, the negative impact of the
pandemic on the global economy in some
cases will exceed levels last seen during
the financial crisis and very likely cause a
great depression. Economists’ forecast for
GDP growth in 2020 tends to be more and
more gloomy and agreed that the economic
impact of the coronavirus outbreak will not
show fully until the second quarter this year.
In late March, JP Morgan said U.S. GDP
could drop 14% in second-quarter (Morgan
Stanley: 30.1%, Goldman Sachs: 24%).
Morgan Stanley and Goldman Sachs
expected the world economy to contract
about 1% this year. On 31 March, Goldman
Sachs lowered its forecast for U.S. GDP to
34% and raised the forecast for the
unemployment rate to 15%. It is conceivable
that such adjustments will hit market
confidence and spark massive volatility,
especially as unfavorable data are released.
Third, some risk indicators may
deteriorate and cause debt crisis in some
countries. After examining main indicators
for sovereign risk and systemic risk, the
fiscal situation of few worst-hit European
countries is still normal. The fiscal deficit
accounts for less than 3% of GDP for Italy,
France, and Spain, but the government debt
to GDP ratios are relatively high around
100%-135%. Government costs are piling up
for combating the virus outbreak and
shielding companies and households from its
Special Topic
Offshore RMB Express 11
impact while fiscal revenue plunge as a
result of economic slowdown. It is possible
that debt crisis of few major EU countries
could cause financial turmoil worldwide.
Facing such an economic maelstrom that
could be more painful than the 2008 financial
crisis, the uncertainty of RMB exchange rate
has increased. In the short term it mainly
depends on two factors:
1. Internal factors are important pillars
supporting the RMB exchange rate. The
virus outbreak in China has been put under
control in the short term and the chance for
large-scale community transmission is
relatively low. Social life and economic
activities are gradually back to normal, and
the PMI has rebound in March. Although
global economic activities would take time to
recover under unfavorable situations such as
weakened demands and supply chain delays,
the foundation is established. In addition,
China is one of the few countries that still
applies conventional monetary policy. The
China–U.S. interest rate differential
maintains on a relatively wide level, and
offshore investors are increasing their
holding of onshore RMB assets, which also
benefits the RMB exchange rate.
There is a time lag for virus outbreak
between China and Europe/U.S., so is its
impact on the economy. China was worst-hit
by the virus in February, and its economy in
the first quarter suffered the most. While the
disease broke out in Europe and the US in
March and extended to April, the economic
data in the second quarter should be more
affected. Therefore, if China’s slow economic
reboot continues, while the U.S. and
European economies are still struggling, it
would be helpful in stabilizing the RMB
exchange rate.
2. External factors are triggers for RMB
fluctuations. The dollar has buoyed as
worries about massive economic disruption
caused by the coronavirus pandemic prompt
investors to dump riskier assets and look for
havens. In the short term, the DXY remains
high, putting a further downward pressure on
RMB. In addition, if a sudden credit crunch,
systemic risk, or sovereign debt crisis occurs,
it may cause panic and herd effects,
triggering more market volatility. Therefore,
it’s too early to rule out CNH's further
divergence from CNY in a short period of
time.
Special Topic
Offshore RMB Express12
In general, RMB exchange rate is supported
in many ways on the fundamentals side, but
from market perspective, it’s not all optimistic.
We list two scenarios below:
In the first scenario, the virus outbreak in
Europe and America has passed the so-
called inflection point and has been gradually
put under control. Along with the recovery of
global risk appetite, the downward pressure
on RMB has eased. CNH mainly fluctuates
between 7 and 7.1 and has the opportunity to
rebound further if any positive data release.
In the second scenario, the pandemic
continues to spread in Europe and America,
and cause great economic recession in U.S.
or sovereign debt crisis across Europe. CNH
will be under greater pressure with room for
more flexibility.
15
Chart Book
Offshore RMB Express14
Market Indicators
Hong Kong RMB Deposits (in RMB bn) Hong Kong 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 March 2020)
Source: Bloomberg
Source: Bloomberg Source: BOCHK Global Market estimate
End of Mar:
Chart Book
Offshore RMB Express16
RMB Clearing Transaction Value (RMB tn)
SWIFT World payments currency ranking & market share
Source: HKICL
Source: SWIFT
#5
October 2016 February 202040.55%USD#1
EUR 32.26%#2
GBP 7.61%#3
JPY#42.11%CNY
EUR 32.61%#2GBP 6.81%#3JPY 3.42%#4
#51.82%#5 CAD
CNY#6 1.67%
USD#1 41.48%
1.73%#6
AUD
CAD
#7 1.57%
HKD#8 1.41%
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.
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