Our stories this week:
Commodities giant Rusal is likely to become the first Russian company to issue a Panda bond having registered a Rmb10bn ($1.45bn) programme on the Shanghai Stock Exchange this week.
China’s exchange regulator has created a new channel for Chinese investors to put their money into Hong Kong IPOs as cornerstones. Market watchers say this could potentially diversify the pool of cornerstones away from the conventional state-owned enterprises.
BNP Paribas will be focusing its China DCM efforts on Panda bonds having recently become one of just four foreign corporate debt underwriters in the China interbank bond market (CIBM).
Bank of England maintains London’s RMB business is still growing although Luxembourg is eyeing opportunities from Brexit.
Could digital currency become the next step of RMB internationalisation? King & Wood Mallesons says it could.
FX:
The main result of the re-opening of the Chinese market this week was a closing of the spread between onshore RMB (CNY) and its offshore counterpart (CNH). The CNY was trading at 8.8765 against the dollar, down 0.14%, as of 11.25am, according to Wind data. The CNH was trading flat 6.8641 but had lost 0.9% since Monday. PBoC set the dollar fix at 6.8819 on Friday, down 109bp. In terms of currency indices, the Thomson Reuters CNY reference index closed at 94.95 on February 8, up 0.2% from the end of last week.
In the offshore market, the overnight CNH Hibor was set at 1.74%, slightly above the 1.62% a day earlier.
The State Administration of Foreign Exchange (Safe) has quickly moved to quell doubts over China’s declining FX reserves, which dropped below the $3tr level for the first time since 2011. China’s FX reserves ended January at $2.9982tr — a 0.4% drop from the previous month — although Safe said there is nothing to fear because the country still possesses the largest FX reserves in the world. In addition, the regulator explained that a large portion of the drop was due to a decline in the value of non-dollar assets as a result of a stronger greenback.
Echoing the same view is CICC’s research team, which put out a report on Tuesday commenting that the impact of the drop is more psychological than material. The report said China’s close to $3tr reserves is more than enough and people should only start to worry once the headline number drops below $2.6tr.
A heavyweight of the China’s financial markets, Yu Yongding has called for the authorities to overcome their fears of moving away from a controlled FX regime. The academic pointed out that China is dealing with RMB depreciation pressure, declining FX reserves, independent monetary policies, market stability and renminbi internationalisation all at the same time. Among these issues, he suggested that the authorities’ efforts to keep the renminbi stable amid a rising US dollar should not be a priority. Given the country’s huge trade surplus and the $3tr in FX reserves, he said the authorities should not be afraid of letting the renminbi float. Yu is a director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS) and former president of the China Society of World Economics.
RMBi news:
Standard Chartered’s Renminbi Globalisation Index (RGI) ended 2016 with a whimper, close at 1,926 points. That represents a month-on-month drop of 2%, a 10.5% decline in 2016 and the lowest reading since July 2014. The culprits for the sorry performance were falling CNH deposits and cross-border payments, which accounted for 87% of December’s decline. To top it off, Standard Chartered predicts 2017 to be a re-run of 2016.
Hubs:
Taiwanese banks have cut their business exposure to mainland China in the last two years, according to Fitch. The rating agency said this will allow the banks to better deal with contagion risks stemming from China's debt overhang, pressure on the renminbi exchange rate, or a potential deterioration in cross-border relations.
"Taiwanese banks are also now in a stronger position to weather volatility in the renminbi than they were a few years ago," wrote Cherry Huang, director, financial institutions. "Sales of target redemption forwards (TRFs) - a structured derivative product which some investors have used to hedge renminbi exposure and to speculate on currency moves - have fallen significantly from their 2014 peak. We expect sales to remain subdued, reflecting stricter regulation on mis-selling and speculation as well as the more uncertain outlook for the renminbi."
Fitch estimates that the potential losses from TRFs would be small relative to bank earnings - even if the renminbi were to depreciate more sharply than forecast, Huang added.
The Taiwan Futures Exchange saw ADV for its USDCNH futures contracts drop in January by nearly 60% to just 163 contracts. The options market, meanwhile, saw a 23% increase in daily average from 47 to 58 contracts.
Enhanced Investment Products Limited’s (EIP) launched its first leveraged product in Hong Kong, called XIE Shares Chimerica FTSE N Share Daily Leveraged Product, on February 8, the firm said in a statement. The exchange-traded fund will be listed on HKEX. The ETF is the first leveraged product in Hong Kong to provide leveraged exposure to US-listed Chinese depositary receipts (ADRs). The product covers blue chip and new economy stocks such as Alibaba, Baidu and JD.com.
Also in Hong Kong, RMB clearing activity contracted slightly in the month of January 2017, down 2% to Rmb15.2tr, the lowest volume since October last year.
The Hong Kong exchange said average daily volume (ADV) across its RMB futures contracts reached 5,226, up 60% from a year earlier, in January 2017. The USDCNH futures are still the most traded, with 5,135 ADV, followed by the CNHUSD contract, with ADV of 87. HKEX added that on January 5, USDCNH futures contracts saw a record 20,338 contracts traded, with open interest also reaching a record a day earlier at 46,711 contracts.
The Singapore Exchange said in a monthly report that volumes for the USDCNH futures contract was 107,858 in January 2017, up 57% month-on-month and up 173% year-on-year.
Bonds:
Foreign ownership of Chinese government bonds, which have so far been the main target for foreign investors, dropped in the month of January by Rmb1bn to Rmb622bn, according to CEIC data. The second largest category of holdings by foreign entities were policy financial bonds, with total holdings of Rmb393bn in the same month, down 7.3% from the end of 2016.
FTZ:
Chinese state media reported on February 9 that the Shanghai free trade zone (FTZ) will continue to test economic reforms in China.
“The Shanghai FTZ will conduct more reforms to enhance trade facilitation,” Shang Yuying, head of the Shanghai municipal commerce commission, said in the piece.
The FTZ’s negative list, which includes sectors that do not allow foreign investment, is set to be further shortened. The number of items on the list has been cut from 190 to 122 since the Shanghai FTZ launched.