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RMB holiday round-up: January 3, 2017

happy 2017 230px
By Paolo Danese
03 Jan 2017

Welcome back and Happy New Year. While we were on a break, China revised its official trade-weighted currency basket, added two new RMB qualified foreign institutional investors (RQFII) and set stricter rules for the individual quota of foreign exchange (FX) purchases that reset on January 1.

Basket shuffle:

The main announcement during the holidays came from the China Foreign Exchange Trade System, under People’s Bank of China. CFETS revised its trade-weighted basket for the RMB for the first time, a little over a year after its launch. The new basket also reflects the introduction of several new currencies that are now directly tradable in the onshore interbank foreign exchange market.

Specifically, the basket went from 13 to 24 currencies and adds the South African rand, the Korean won, United Arab Emirates’ dirham, the Saudi Arabian riyal, the Hungarian forint, the Polish zloty, the Danish krone, the Swedish krona, the Norwegian krone, the Turkish lira and, finally, the Mexican peso.

The new currencies have a combined weightage of 21.09%.

“The new basket currencies cover those of the major trade partners of China, so as to strengthen the representativeness of the currency basket,” CFETS said in a statement.

Among the larger components of the basket, the revision caused the dollar to see the biggest drop, losing 4% of its weight to 22.4%. The euro went from 21.39% to 16.34%, and the yen from 14.68% to 11.53%.

CFETS also noted that following the inclusion of the RMB in the IMF special drawing rights basket, it will conduct a review of its indicative SDR basket this year.

The CFETS basket ended December 2016 at a value of 94.83, up 0.16% from the end of November. The SDR basket was up 0.25% to 95.50, while the index based on weights by the Bank for International Settlements was at 96.24, up 0.3%.

New year, old FX struggles:

In the spot market, the year started with PBoC fixing the daily parity of the renminbi against the dollar at 6.9498, down 128bp. In the spot markets, the onshore RMB (CNY) was trading at 6.9549 as of 2:35pm Hong Kong time, down 0.14%, while the offshore RMB (CNH) had tightened by the same amount to 6.9652.

Investment quotas:

The RQFII scheme saw the addition of two new entities in December 2016, according to the State Administration of Foreign Exchange. In South Korea, Eugene Investment & Securities received a Rmb700m ($100.7m) quota, while Germany’s Allianz Global Investors received a Rmb4bn quota, only the third asset manager in the country to obtain one. 

Seoul-based entities have now received Rmb73.7bn in RQFII quotas, or 61.42% of the country limit. PBoC increased the number of RQFII-enabled jurisdictions on December 21, adding Ireland with a Rmb50bn quota.

Regulatory news:

Stability seems to be the motto that the PBoC will follow this year, at least according to central bank governor Zhou Xiaochuan’s New Year speech over the weekend. Zhou said supply-side reforms are set to deepen in 2017, which lay the path to a brighter future for China, although there will be many challenges. As a result, PBoC’s primary goals this year will be to maintain stable monetary policies, ensure ample liquidity in the market and continue to push financial reforms in a deliberate manner, Zhou added.

Meanwhile, Safe has specified that individual conversions of RMB into foreign currencies will be subject to increased scrutiny, and that conversions for investment purposes are excluded, including purchases of overseas real estate. Such transactions will have to take place via authorised channels such as the qualified domestic institutional investor (QDII) scheme, Safe said in a statement. Chinese citizens are entitled to convert up to $50,000 per year each, with the quota untouched by the regulators so far despite increasing capital outflow pressure. 

CSRC: No mad rush for reforms

A similar note came from the China Securities and Regulatory Commission, with local Chinese media quoting an unnamed official stating that there will not be urgency in pushing out reforms in 2017. The official said that the year is set to be challenging thanks to global macro concerns, which means that any changes or reforms will be introduced in a more prudent and cautious manner. Areas the CSRC will be focusing on are the fine-tuning of the QFII and RQFII schemes, and opening up of the securities and futures market.

NDB loans: 

The Brics New Development Bank (NDB) signed its first loan agreement in China, the bank announced on December 21. NDB will lend Rmb525m to a solar power project in the Shanghai area, the first in the country, using the proceeds from its July 2016 green RMB bond. 

Data corner:

Hong Kong RMB deposits saw another drop in November 2016, according to the Hong Kong Monetary Authority. The level fell to Rmb627.6bn, down 5.3% over a month and the lowest level since January 2013.

By Paolo Danese
03 Jan 2017