the April 2015 RMB newsletter here
Please refer to disclaimer | April 2015 - 1 RMB Competence Centre April Newsletter 20th Issue HIGHLIGHTS OF THIS ISSUE China is going offshore! - Silk Road Initiatives - China-led Asia Infrastructure Investment Bank (AIIB) gains global support Regulatory News: - China authorities revise rules to help the real estate sector - SAFE new regulation to simplify FX management of FDI and ODI - Mutual funds are allowed to invest in Hong Kong stocks via "Stock Connect" Free Trade Zone News: - PBoC new regulation on offshore financing via Free Trade Accounting Unit system - New Free Trade Zones are approved by China top decision maker RMB Competence Centre Research: - Other News: - The first municipal bond is ready to be issued in the China Interbank Bond Market - Updates on other markets and clearing centers | April 2015 - 2 CHINA IS GOING OFFSHORE! Silk Road Initiatives Ever since President Xi Jinping gave speeches on regional development in 2013, China has heralded plans to lay networks of infrastructure to better connect its economy with the rest of Asia, Africa, the Middle East and Europe. The plans for roads, railways, ports and other related projects are a modern version of the Silk Road the trade routes that carried goods to and from China for centuries. One plan centered on the Asian land mass is called the Silk Road Economic Belt; the other looks to the South China Sea, the South Pacific and Indian Ocean and is known as the 21st Century Maritime Silk Road. Together, they go by Chinese officials on March 28th to specific projects, it outlined some priorities: - Financing is expected to draw from a variety of sources. The China-led multilateral Asian Infrastructure Investment Bank, which is expected to begin operations later this year with $100 billion in capital, a government-backed $40 billion Silk Road Fund and the New Development Bank set up by Brazil, Russia, India, China and South Africa get a mention. - -gas pipelines. Fibber-optic networks are also to get funding, as are information technology, new energy and bio-technology. Customs and other regulations that might inhibit trade and investment are to be smoothed out. - The Mekong River region in Southeast Asia, which China has previously identified for economic cooperation, gets a shout out, but so does almost every other regional economic plan of recent years. The China-Pakistan and China-India-Bangladesh-Myanmar economic corridors are also mentioned. - en ports, from Tianjin in the north to Haikou in the south, are earmarked for upgrading. The Shanghai and Guangzhou airports are slated to become logistics hubs. Inland, largely poor provinces are supposed to see a boost too. Source: The Wall Street Journal China-led Asia Infrastructure Investment Bank (AIIB) gains global support On March 30, Egypt, Finland and Russia formally submitted the application to be the founding members. According to Xinhua net, as of the end of March, 44 countries have shown China their willingness of being the initiative members of AIIB. Two days before, Russia, Australia and the Netherlands said they plan to join the China-led Asian Infrastructure Investment Bank (AIIB), adding clout to an institution seen as enhancing China's regional and global influence. The AIIB, seen as a challenge to existing institutions the World Bank and Asian Development Bank, has drawn a cool response from the United States, despite which European U.S. allies including Britain, France, Germany and Italy have already announced they would join the bank. Other countries such as Turkey and South Korea have also said they would join. Brazil, China's top trading partner, said on March 27th it would sign up and that there were no conditions set. "Brazil is very interested in participating in this initiative," the office of President Dilma Rousseff said in a statement. Russian First Deputy Prime Minister Igor Shuvalov, speaking on March 28th at a forum in Boao on the southern Chinese island of Hainan, said the country plans to join the AIIB, according to the official Xinhua news agency. | April 2015 - 3 Speaking at the same forum, Australian Finance Minister Mathias Cormann said the country was planning to apply to become a founding member, according to Xinhua, while later on the same day the news agency confirmed that Georgia had also applied. The Netherlands also plans to join, Dutch Prime Minister Mark Rutte said on his official Facebook page after a meeting with Chinese President Xi Jinping. China's Finance Ministry said earlier on March 28th Britain and Switzerland had been formally accepted as founding members of the AIIB, a day after Brazil accepted China's invitation to join. China's Finance Ministry said Austria had also applied to join and had submitted its documents to China. "We should push forward with the creation of a regional hub for financial co-operation," Xi said at the forum, adding China should "strengthen pragmatic cooperation in monetary stability, investment, financing, credit rating and other fields." The AIIB has been seen as a significant setback to U.S. efforts to extend its influence in the Asia Pacific region to balance China's growing financial clout and assertiveness. Source: Reuters, Xinhua Key information on the AIIB - AIIB aims to be a multilateral framework to finance infrastructure projects in the wide Eurasian region. It will be a supplement to the existing international financial organisations such as World Bank, Asian Development Bank to serve the economic development. It is also considered to be helpful for China economy globalisation and a strong promoter of the RMB internationalisation. - The authorized capital of AIIB is proposed to be $100 billion - According to Chinese official website, at the end of March, 45 countries have applied to be the Prospective Founding Members. However, the final list of the countries will be available after April 15th. Mapping of the member countries of AIIB Source: BNP Paribas ne | April 2015 - 4 UPDATES ON REGULATIONS China authorities revise provisions to boost the real estate sector On March 30th -Rural Development of China (MOHURD) and China Banking Regulatory Commission (CBRC) jointly released a circular regarding the decrease of the down payment requirement for the second-property. Major revisions Before From March 31, 2015 Requirement on the down payment when applying a bank loan for the second property 60% (70% in Beijing, Shanghai, 40% even if there is an outstanding Guangzhou and Shenzhen, etc.) loan for the first property Requirement on the down payment when applying a loan from Provident Fund 20% for the fi 2 30% for the first property > 90 m2 ; 20% for the first property; 30% for the second property if the Provident Fund Loan for the first property is paid off. On the same day, Ministry of Finance published a relaxed tax policy on the trading of real estate. Business tax will be exempted from the trading of the second-hand properties which are held more than 2 years by the owner, lowered compared to the previous requirement of 5 years. Source: BNP Paribas SAFE new regulation to simplify FX management of FDI and ODI China State Administration of Foreign Exchange (SAFE) released a circular on February 28th to simplify the rules regarding Foreign Direct Investment (FDI) and Overseas Direct Investment (ODI). The new regulation will take effect from June 1st 2015, replacing the previous related regulations. According to this new regulation, - Foreign exchange registration for FDI and ODI will be done at the settlement banks and exempted from administrative approval by SAFE. - The requirement on pre-monetary contribution and equity purchasing will be removed. The precontribution will be replaced by the registration with the settlement banks. - The FX registration with SAFE for the reinvestment by offshore entities that are set or controlled by Chinese entities will be removed. - The annual FX examination for FDI and ODI will be replaced by the registration on the equity. Banks are required to check the authenticity of the transactions under FDI and ODI, do FX registration through the systems linked to SAFE, and keep the related documents in case of SAFE inspection. Source: BNP Paribas, SAFE | April 2015 - 5 Mutual funds are allowed to invest in Hong Kong via "Stock Connect" China Securities Regulatory Commission released a guide for mutual funds investing H shares through Stock Connect scheme on March 27th. According to this Circular, mainland mutual funds are allowed to invest in Hong Kong shares via the ShanghaiHong Kong Stock Connect. The move may give some support to the cross-border trading scheme, which has seen dwindling interest from investors. Up until now, Chinese mutual funds have been able to invest in overseas markets only through the Qualified Domestic Institutional Investor (QDII) program, which requires regulatory approval. Giving mainland funds access to Hong Kong shares via the Shanghai-Hong Kong Stock Connect will promote product and business innovation and be good for steady development of the connect scheme. The scheme, launched late last year, allows Hong Kong and mainland investors to invest in each other's markets up to a daily quota. Mutual funds have to be subject to the daily quota as well. Interest in the scheme has been waning. On March 27, mainland investors used only 5 percent of their quota for Hong Kong shares, while those in Hong Kong utilized only 2 percent of what they could buy on the mainland. Chinese investors have shown little enthusiasm toward the scheme because investing in Hong Kong shares gives them little asset diversification, but expose them to foreign exchange risks. Recent bullishness in the mainland stock markets has also made Hong Kong shares less attractive. China-listed companies are on average 35 percent more expensive than their Hong Kong peers . Source: BNP Paribas, Reuters Rules for foreign investors trading on interbank market will be relaxed China will relax rules for foreign investors for trading on its Shanghai-based interbank market, including making it easier to obtain quotas such investments, two sources with direct knowledge of the matter told Reuters on March 25th. Participants in China's capital market investment schemes for foreigners - the Qualified Foreign Institutional Investor (QFII) scheme and its renminbi-denominated version (RQFII) - will in the future use a registration system that eliminates the need to apply for regulatory approval for quotas in the interbank market, the sources said. Foreign investors will also be permitted to invest in more products traded in the interbank market, such as banks' certificates of deposits (CDs), bond repurchase agreements and swaps, including interest rate swaps, the sources said. Qualified foreign investors are currently confined mainly to trading spot bonds and conducting lending and borrowing in the money market. No firm date has been set for the reforms, but it is possible they could be implemented as early as May. China's central bank and foreign exchange regulators declined to make any immediate comment on the moves. Source: Reuters | April 2015 - 6 UPDATES ON FREE TRADE ZONES PBoC regulation on offshore financing via Free Trade Accounting Unit system On February 12th, 2015, PBoC Shanghai head office released rules on raising funds offshore through Free Trade Accounting Unit (FTU) system. The new regulation which is applicable to the expanded Shanghai Free Trade Zone (SFTZ) and considered as a significant step towards the opening of China capital account took effect immediately. Highlights - Qualified corporates and financial institutions are allowed to raise funds offshore via FTU - Both RMB and FX funds are available - No pre-approval from PBoC or SAFE is required - The quota for offshore financing is enlarged - The use of borrowed funds has restrictions It must be noted that all the offshore financing activities should be executed via the FTU system as per this regulation. What are the qualified entities? Corporates that meet all the three requirements below 1. Registered in the SFTZ 2. Legal entities but not branches 3. Have opened Free Trade Accounts (FTA) at financial institutions Non-banking financial institutions that satisfy one of the following requirements - Registered in the SFTZ and have opened FTA at banks, or - Have established FTU accredited by PBoC Banks - Have established FTU accredited by PBoC Offshore financing quota - The Total Amount of Offshore Financing cannot exceed the quota which is calculated based on the capital (paid-in capital and capital reserve). - The offshore financing quota varies with different entities (see the table below). | April 2015 - 7 * Except for banks, the capital written in the table includes paid-in capital and capital reserve. ** In principle, the quota shall be calculated once a year based on the financial statement of the past year. *** The macro prudential coefficient currently equals 1 and can be changed by PBoC if necessary. Calculation on the Total Amount of Offshore Financing * If the medium/long-term offshore financing is repaid in advance more than 3 times within 1 year, all the outstanding balance and new financing then will be considered as short-term. ** Business risk conversion factor is 0.2 for trade finance transactions in foreign currency. If financial institutions raise offbalance sheet financing and other contingent liabilities in any currency for their clients, the risk conversion factor is 0.2. If the contingent liabilities are resulted by the financial institutions business, the risk conversion factor is 0.5. | April 2015 - 8 Special cases Items excluded from consuming offshore financing quota Items included in a special way Trade finance of financial institutions and corporates in foreign currency will be included for consuming the quota with a business risk conversion factor of 0.2 and a tenor risk conversion factor of 1. If financial institutions raise off-balance sheet financing and other contingent liabilities in any currency for their clients, the risk conversion factor is 0.2. If the contingent liabilities are resulted by the financial institutions business, the risk conversion factor is 0.5. Use of the borrowed funds For corporates and non-banking financial institutions, the funds should be used for the operations and projects in the SFTZ or offshore. The funds borrowed by banks should be used for businesses within the FTUs to support the industrial development in the SFTZ or offshore. However, according to the detailed rules on the FTA (PBoC Shanghai Circular 46, May 22nd 2014) , the funds in own loans from the financial institutions in Shanghai. The duration of loans should be more than 6 months. For the time being, the financing for real estate is not allowed. Implications and impacts Offshore financing is more advantageous in RMB than any other currency because: - the currency risk conversion factor is lower - some items are excluded from consuming offshore financing quota, e.g. trade finance Medium/long-term offshore financing is encouraged by PBoC The quota for offshore financing is enlarged compared to the previous regulation (PBoC Shanghai Circular 22, 2014): - For corporates, quota = paid-in capital × 1 × macro prudential coefficient | April 2015 - 9 For non-banking financial institutions, quota = paid-in capital × 1.5 × macro prudential coefficient As mentioned in this regulation, there are 3 options for offshore financing. After the entity in the SFTZ has chosen one of the 3 options, it can be changed only once with PBoC approval. Source: BNP Paribas New Free Trade Zones are approved by China top decision maker The CPC politburo approved on March 24th the formation of three new free trade zones in the city of Tianjin, southeastern Fujian province, and southern Guangdong province as well as the extension of Shanghai free trade zone. The three new free the green light, will copy the model of the Shanghai FTZ established in 2013 as a testing ground for looser rules governing currency conversions and foreign direct investment, according to a post-meeting statement of the Communist Party Politburo on March 24th. ip and will be expanded as well. Despite the green light from the top autho which have been repeatedly delayed. In its proposal, Guangdong plans to focus on deepening economic integration with Hong Kong and Macau, to foster a business environment under the rule of law that matches international standards. The Guangdong zone as Hengqin in Zhuhai. Meanwhile, the free-trade zone in Fujian will focus on transactions between Taiwan and the mainland, while the free-trade zone in Tianjin will serve Beijing, Tianjin and Hebei province. Source: Xinhua | April 2015 - 10 RMB COMPETENCE CENTRE RESEARCH Executive Summary With the Chinese economy gaining momentum in world trade finance, RMB has become the seventh most popular currency for settling global payments. According to the PBOC, the RMB is now used by almost 60 central banks and sovereign wealth fund for their global investments. internationalisation and widen the role of the SDR mechanism. But there are also challenges since China still keeps a tight grip on the yuan's value and Chinese capital account opening is also just started. In this document we explain the differences between the integration of RMB into the COFER (Composition of Official Foreign Exchange Reserves) and the inclusion of the RMB into the SDR which might happen this year. We also detail the reasons and dynamics for a successful SDR inclusion which would pave the way for the RMB to become a world global reserve currency. Comparison between COFER and SDR - COFER is an IMF qualification showing proportion on the currency composition of official foreign exchange reserves, while SDR is an IMF currency used for investment and financing. - Integration into COFER would require the RMB to be considered as fully convertible and as such the hurdle for inclusion into COFER looks to be higher than SDR integration - A likely SDR inclusion does not equal to considering the RMB as a reserve currency Currency Composition of Official Foreign Exchange Reserves (COFER) COFER is an IMF qualification showing proportion on the currency composition of official foreign exchange reserves. The currencies identified in the quarterly survey include: the U.S. dollar, the euro, pound sterling, the Japanese yen, the Swiss franc, Australian dollar, Canadian dollar and all other currencies combined as ― Claims in other currencies. COFER data provide a crucial insight into the evolution of the currency composition of foreign exchange reserves, facilitating analysis of developments in international financial markets. With the RMB gaining momentum in world trade settlement, the current 7-currrency breakdown may be viewed as somewhat limited and the IMF Executive Board is seeking to expand country participation and increase the currency breakdown balanced against reporting costs. Nevertheless, the hurdle for a currency to be considered a reserve currency in COFER is full convertibility, which for the moment disqualifies the RMB. Special Drawing Right -----The IMF Currency The Special Drawing Right is an interest-bearing funding currency created by IMF in 1969, giving members of IMF the option to exchange for freely usable currencies and supplement their official reserves. According to the latest review conducted on December 30, 2010, the SDR basket currently consists of four currencies: U.S. Dollar, Euro, Pound Sterling and Japanese Yen with their weights of 41.9%, 37.4%, 11.3% and 9.4% respectively. The total amount of SDRs has reached 238 billion by March, 2015. o Allocation & Voting rights: Special drawing rights are allocated to member countries by the IMF. A quota determines its allotment of SDRs. Any new allocations must be voted on in the SDRs Department of the IMF and pass with an 85% majority. Voting power is determined by a member country's IMF quota. US and Euro Area have approximately 17% and 22%of voting rights, giving them the power of veto, the SDRs, an 85% majority of support is also required. | April 2015 - 11 Percentage of voting rights in IMF Euro Area United States Japan 22% 37% 17% United Kingdom China Saudi Arabia Canada 2% 2% 3% Russia 3% 4% 4% 6% India Other countries Source: IMF o Interest Rate: Special drawing rights carry a weekly determined interest rate based on "a weighted average of representative interest rates on 3-month debt in the money markets of the four SDR basket currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound sterling)". If a member's SDR holdings rise above its allocation, it effectively earns interest on the excess. Conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. On October 24, 2014, IMF amended the rule for setting the SDR interest rate by introducing a floor of 0.050 percent. Source: IMF | April 2015 - 12 o Criteria for selection of SDR Basket There are two major criteria for the currency selection of SDR basket: - top exporters of goods and services. The criterion would ensure that the issuers of basket currencies are those that play a central role in the global economy. for the freely usable currencies. international transactions, include currency composition of official reserve holdings, currency denomination of international banking liabilities and debt securities. China fits the qualitative criteria, where RMB plays an important role in the global trade settlement but involves less in currency denomination of international banking liabilities and debt securities. trading in the principal foreign exchange markets, include volume of transactions in foreign indicator). Both CNY and CNH FX markets are very liquid. o New four tailored criteria: In the next review of SDR basket in October 2015, the IMF will take these four criteria into account. The new criteria will seek to ensure the attractiveness of the SDR as a reserve asset and its potential for a broader role in the international monetary system. Indications for the new criteria include: - Volume of transactions in foreign exchange spot markets; - Volume of transactions in foreign exchange derivatives markets and over the counter derivatives trade; - Existence of an appropriate market-based interest rate instrument; and - Currency composition of global official reserve holdings ? - currency system - Impact: Fasten the internationalization of RMB - Challenge: RMB, with no benchmark interest rate, is still heavily regulated - Eventually this is a very politically driven process In October 2015, IMF will finalise the next review of SDR bask review process is on an ad hoc basis, another review could be organized in the coming year(s) if RMB fails to be included this time. It is a false belief that the review process only happens every 5 years. o Why should RMB be included? RMB has now become the fifth most popular currency for settling global payments, just behind the outbound trade. The volume of RMB-denominated trade settlement has reached RMB 6.5 trillion in 2014. In terms of documentary credits, 9.43% of the global documentary credit payments are settled in RMB. As a reserve currency, 60 central banks and sovereign units already hold some form of RMB assets in their investments, making it the seventh reserve currency by popularity. RMB could become the third reserve currency in the world around 2017 to 2018. As such, RMB not only has a strong case to make for its inclusion in the currency basket, but tha balanced multipolar currency system. | April 2015 - 13 o currency as well as serve as a milestone to move forward the internationalisation of RMB, thus - Fastening the internationalization of RMB: Including the RMB within a basket of free-floating, convertible currencies may encourage Chinese government to speed up reform in domestic markets like the debt & foreign exchange market and the financial system in general, adding - Gaining power in global economic and political affairs: political presence in the international financial market community. - Widening the role of SDR mechanism: The RMB may be able to broa resolving balance-of-payment difficulties and as a reserve currency. On the one hand, the caused by the unwinding global imbalances. On the other hand, with the easy access to RMB under the SDR mechanism, some reserve managers may increase their demand for SDR as a proxy for holding RMB assets in their portfolios. This will make the value of the basket more representative of the structure of world trade. o - No benchmark interest rate in RMB: The benchmark interest rate for SDR is based on an average weighted of 3-month floating rate on debt in the money markets of the four SDR basket currencies, such as 3-month Libor/ Euribor. In terms of onshore CNY market, although China has development its own 3 months Shibor and further liberalised the lending interest rate controls, the core interest rate in the loan & deposit market is still driven by PBoC benchmark, which may not be qualified as market driven interest rate in SDR. For the offshore CNH market, Hibor is competitive candidate but still lacks liquidity. - RMB is still heavily regulated: Despite the progress made in the internationalisation of RMB, the onshore CNY market is still heavily regulated. In terms of capital inflows, foreign investors are only allowed to invest in a limited scope of cross-border securities products under QFII and RQIIF scheme; the cross-border funding from CNH market is subject to FX markets, China switched to a managed float of USD/CNY in 2005, but foreign exchange rate of CNY is still heavily driven by PBoC monetary policy. For example, the 2% trading band FX market volatility. All these restrictions and regulations on the RMB cross-border transactions indicate that the RMB has not yet become a fully convertible currency. - Inclusion of the RMB into the SDR is subject to the US veto right: As such strong political support will be needed from all global players. | April 2015 - 14 OTHER NEWS China The first municipal bond is ready to be issued in the China Interbank Bond Market China's Jiangsu province plans to be the first to issue bonds since Beijing said early this month it will help local governments use the fledgling municipal bond market to restructure their debt loads. Jiangsu will issue 64.8 billion yuan ($10.44 billion) of bonds, according to a notice posted late on March 25th by the China Central Depository and Clearing Co. No auction date was given for the bonds, which could be the first issued by a local government this year. The notice said Jiangsu will issue 13 billion yuan of three-year bonds, 19.4 billion yuan of five-year bonds, 19.4 billion yuan of seven-year bonds and 13 billion yuan of 10-year bonds. Jiangsu is among China's most indebted provinces, according to Moody's. In a report earlier this month, the rating agency said the province's debt load approached 1.6 trillion yuan ($257.52 billion) as of 2013. On March 8, the Ministry of Finance announced that Chinese local governments will be permitted to swap up to one trillion yuan ($160.95 billion) of high interest, maturing debt for official lower interest provincial or municipal debt. INTEREST IN DEBT-SWAPS Since then, markets have focused on how the debt swap will unfold. Chinese equity markets, led by financial counters, have risen sharply in the wake of the announcement. Bond sale announcement on March 25th did not specify whether this 64.8 billion tranche constituted a portion of the one trillion yuan swap or would fall under the regular 600 billion yuan ($96.57 billion) quota for regional and local government debt already approved in the general 2015 budget. The Jiangsu offer is the first bond sale notice by a provincial government since the ministry's debt-swap announcement. Provinces issuing debt this year might not be required to state publicly whether individual issues fall under the general budget quota or the debt swap programme, according to a Moody's senior analyst who covers Chinese local government debt. In recent years, local governments have circumvented formal restrictions on borrowing by setting up off-balancesheet "local government financing vehicles" (LGFVs) to borrow on their behalf. Many of these financing platforms are now having problems repaying their debt as China's economy slows. Recent central government policy moves have been focused on opening avenues for official borrowing by local governments to counteract the rise of risky loans by lightly regulated LGFVs and other shadow financing channels. Source: Reuters RMB falls to the seventh place as global payment currency in February China suffered a second setback in as many weeks in its drive to boost the use of its currency abroad, even as the country steps up efforts to open up its capital account. The use of the Chinese yuan as a currency for world payments fell two places to seventh in February, with a share of 1.81%, according to the Society for Worldwide Interbank Financial Telecommunication, or Swift, in a report Monday. | April 2015 - 15 That compares with a record-high 2.17% in December, according to the organization that is used by banks to coordinate international transactions. The 20.4% drop compared with January is a reversal from November when the yuan broke into the top five of world payment currencies last year, overtaking the Canadian dollar and Australian dollar by value. Over the last two years, several new clearing centers for the yuan have emerged across the world as Beijing has promoted the tightlycontrolled currency abroad. Source: The Wall Street Journal China sets 2015 growth target around 7%, lower than 2014 - largest economy. was its lowest level in nearly a quarter-century. At the same time, its leaders signaled concerns that an even sharper drop in growth risks higher unemployment and social unrest. th In remarks bef , Premier Li Keqiang listed the challenges to the Chinese economy, including sluggish investment growth, overcapacity, deflationary pressure and increasing public demand for better social services. Source: The Wall Street Journal Hong Kong Yields on dim sum bonds are higher than onshore peers As offshore yuan bond yields in Hong Kong keep hitting highs, those on dim sum bonds issued by sovereigns and nonbank entities this month have surpassed their onshore counterparts for the first time. Offshore yields in general continue to rise. On March 19th, the average yield of dim sum bonds with a duration of about 2.6 years surged to 5 percent, the highest level since the market was created in 2007. For government bonds, a 5-year yuan bond in Hong Kong was trading with a yield of 3.65/3.59 percent (bid/ask) on the same day, compared with 3.37/3.31 percent in mainland China for the same tenor. The main cause of the offshore market's higher funding cost is the shrinking yuan deposit pool in Hong Kong and a weaker yuan, which has dampened investors' appetite for the currency. In January, Hong Kong's yuan deposits dropped 2.2 percent from the previous month, the biggest fall in seven months. That took them to 981.4 billion yuan ($158.4 billion), below the 1 trillion yuan milestone the city reached at the end of last year. Liquidity in the offshore market is likely to remain tight this year as China is broadening the channels through which foreigners can make investments with yuan. A stock "connect" between Hong Kong and Shenzhen is set to be launched in the second half. Meanwhile, investors are asking for higher yields to compensate for their FX loss after the Chinese currency deviated from a steady appreciation track and lost 2.4 percent last year. | April 2015 - 16 Analysts differ on how the yuan will perform this year, with some forecasting a fall to 6.4 per dollar and others seeing a mild appreciation. However, the yuan saw some support from suspected interventions from the central bank. Spot yuan hit a twomonth high of 6.1948 per dollar in morning trade on March 19th, reversing its weakness this year and extending gains this week to 1 percent. Chinese companies, especially property ones seeing funding costs rise sharply offshore, are starting to consider switching to the onshore market this year to seek cheaper money. Yields on offshore bonds issued by Chinese property developers in local currency have increased more than those on the rest of the offshore RMB market in the last six months. Source: Reuters Global RMB payments increasingly handled outside Hong Kong Global payments in the Chinese yuan are increasingly being handled by offshore yuan hubs besides Hong Kong, as more clearing banks have been assigned in the past two years, transaction services organisation SWIFT said on March 30th. Though Hong Kong still takes the lion's share with over 70 per cent of the market by value, offshore centres excluding Hong Kong handled 25 per cent of global yuan payments in February, compared to 17 per cent two years ago. Singapore and London, which are strong financial centres in their respective regions, played a key role in driving yuan adoption outside of Hong Kong, SWIFT said. Yuan usage has accelerated with the emergence of other offshore yuan clearing centres worldwide, including several countries outside of the Asia-Pacific, SWIFT added. "The use of RMB by more countries, beyond Hong Kong, is a good testimony to the internationalisation of the Chinese currency". The world's second-largest economy has appointed yuan clearing banks in a total of 14 offshore yuan hubs so far, most of which in 2014. However, the yuan fell to the seventh place as a world payment currency in February with a share of 1.81 per cent, down 20.4 per cent from a month earlier, likely due to seasonal effect of the Lunar New Year. Payments across all currencies decreased in value by 9.3 percent for the same period, given February is a shorter month. The yuan broke into the top five as a world payment currency in November, overtaking the Canadian dollar and the Australian dollar. Source: Reuters Taiwan Issuers turn to Taiwan for raising RMB Taiwan has become the hottest place for international issuers to raise renminbi this year, while yuan bond issuances in Hong Kong has slumped as costs hover at a record high. According to Dealogic, US$1.84 billion worth of dim sum bonds had been offered since the start of the year to February 25, down nearly 70 per cent year on year. Meanwhile, US$943 million yuan of yuan-denominated bonds were issued in Taiwan, more than triple the amount in the same period last year. | April 2015 - 17 Analysts say lower costs and an easing of regulations are the main reasons encouraging foreign issuers to flock to the Taiwan renminbi market. On average, it is 10 to 20 basis points cheaper than issuing bonds in Hong Kong. Taiwan last year eased restrictions for insurers investing in foreign currency bonds if the bonds are issued in Taiwan, their investments are no longer subject to a 45 per cent cap on foreign asset ownership. Given the low yield returns by increasing their exposure to renminbi instruments. The yield for dim sum bond offerings stood at a 4.9 per cent as March 3rd, almost a record high, as investors ask for higher yield to compensate for rising risk concerns following the problems that mainland property developer Kaisa faced in making an interest payment on a US dollar bond. Source: South China Morning Post South Korea Korean asset managers look at China for business diversification Korean asset managers are raising their exposure to China following the extension of the RQFII scheme to the country in mid-2014. So far, Beijing has allotted Korea a quota of 80 billion RMB (US$12.8 billion). Broader access to the Chinese market is viewed as a fillip for Korean managers in terms of diversifying their business abroad. In fact, this expansion has become crucial for them, given that their domestic market has been hit hard by a serious capital exodus. drew a ten-month of local bonds and equities. Shinhan BNP Paribas Asset Management (Shinhan BNP Paribas AM), a joint venture between BNP Paribas Investment Partners (BNP Paribas IP) and Shinhan Financial Group, became the first Korean manager to jump on the RQFII bandwagon. It received its licence from the China Securities Regulatory Commission (CSRC) in October last year. This gave Shinhan BNP Paribas AM first-mover advantage in terms of fundraising and building up market share. The market has subsequently become more crowded, with the CSRC awarding RQFII status to another seven Korean entities between November and January. Deogjin Jang, deputy chief executive officer with Shinhan BNP Paribas AM, tells Asia Asset Management that his firm has so far secured a quota of 3 billion RMB. Commission, struck a trade link agreement in mid-2013, earmarking 80 billion RMB of RQFII quotas for Korean Shinhan BNP Paribas AM is well-experienced in the market. We launched a product linked with Hong Kong-listed HShinhan BNP Paribas AM drew down a portion of its quota to launch its first RQFII equity fund in Korea on January 5. The subsequent fundraising reached a high of $40 million; the firm then rolled out its first RQFII fixed-income fund in February. e flexible in terms of subscription and redemption compared to the QFII scheme. This really helps us to broaden our fund | April 2015 - 18 -launched Shanghai-Hong the-ground expertise from our foreign shareholder. In so doing, our equity RQFII fund has appointed HFT Investment In terms of the business, Mr. Jang sees Shinhan BNP Paribas AM as one of the fastest growing Korean asset managers rd; annual asset growth has been pegged at 30%. We also look into overseas portfolios of pension institutions where the firm has been awarded various mandates, ranging from traditional equities and fixed income to alternative assets, including mezzanine and build-transfer-lease or build-transferSource: Asia Asset Management Canada Toronto starts RMB trading, being the first RMB offshore hub in the Americas The first trading hub for C launched in Toronto on Mach 23rd, with an official The opening of a trading hub for the renminbi, also known as the yuan, is touted as a development that will make the cost of doing business with Asian partners cheaper for Canadian companies, as well as boosting trade between the two countries. Toronto joins global financial cities such as London and Singapore that have inked similar deals to become trading hubs for the fast rising currency. The Chamber of Commerce has estimated that Canada could generate up to $32 billion in additional exports over the next 10 years with the establishment of the trading hub. The hub gives businesses the ability to convert yuan and Canadian dollars without going through a conversion into U.S. dollars, something the Chamber of Commerce estimates could save Canadian companies $6.2 billion over the next decade. The hub is seen as offering more than just currency savings. An HSBC survey last year found that 55% of Chinese businesses said they would offer discounts of up to 5% to global partners for transactions denominated in yuan. By adopting the RMB as a payments currency, Canadian traders will have access to a wider universe of Chinese clients, and at the same ti Source: Financial Post | April 2015 - 19 Suriname China and Suriname signed RMB 1billion currency swap China's central bank has signed a one billion yuan (about 160 million US dollars) currency swap deal with the Republic of Suriname, the People's Bank of China (PBOC) said on March 18th. The three-year deal aims to boost bilateral trade and investment and strengthen financial cooperation between the two central banks, said a statement on the PBOC website. The deal could be extended upon agreement by both sides, it said. Source: Xinhua Armenia China and Armenia signed RMB 1billion currency swap A currency swap agreement was signed between China and Armenia valued at 1 billion yuan (162.93 million U.S. dollars), or 77 billion Armenian dram on March 25th. The three-year deal signed by China's central bank and its Armenian counterpart aims to boost bilateral trade and investment, and it could be extended upon agreement by both sides. To encourage international use of the yuan, China has signed currency swap agreements with more than 30 countries and regions since the onset of the global financial crisis in late 2008. Source: Xinhua | April 2015 - 20 DISCLAIMER This document is CONFIDENTIAL AND FOR DISCUSSION PURPOSES ONLY and does not constitute an offer or a solicitation to engage in any trading strategy, to purchase or sell any financial instruments or to enter into any transactions. Given its general nature, the information included in this document does not contain all the elements that may be relevant for an investor to make an informed decision in relation to any strategies, financial products or transactions discussed herein. 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