China and Japan confirm details of currency swaps and plans to invest more in third party markets, the Hong Kong Monetary Authority (HKMA) renews the license of nine authorised institutions as Primary Liquidity Providers (PLPs) for the CNH market in Hong Kong and Singapore sets up new government agency to bridge the funding gap facing Asia’s infrastructure projects.
The People's Bank of China (PBoC) and the Bank of Japan signed an agreement for a bilateral currency swap on October 26 for JPY3.4tr ($28.8bn). That is JPY400bn more than previously expected.
The agreed amount is a 10-fold increase in the swap ceiling from the previous Japan-China currency swap agreement, which expired in 2013. The new agreement will be valid for three years.
The swap is designed to strengthen financial stability and enhance business activity in both countries, the Bank of Japan (BoJ) wrote in an October 26 statement.
It said it could use the swap to provide renminbi funding to Japanese financial institutions facing ‘unexpected difficulties’ in renminbi settlements.
China has signed swap lines with 34 countries, worth a total Rmb3.34tr ($481.2bn).
The currency swap agreement is only one of 12 cooperative documents signed during Japanese prime minister Shinzo Abe's visit to Beijing.
Another agreement was signed to set up a renminbi clearing bank in Tokyo. The PBoC chose Bank of China's Tokyo branch for the role, according to an October 26 statement issued by PBoC.
“This arrangement will benefit businesses and financial institutions of both countries to use renminbi in cross-border transaction,” PBoC wrote in the statement. “It will further facilitate mutual trades and investments.”
The PBoC has appointed 24 clearing banks around the globe.
The Third Party Market Cooperation Forum was also part of China and Japan’s agenda during Abe’s state visit.
The forum, a one-day conference between the two governments, discussed opportunities for China and Japan to jointly invest and develop infrastructure projects in other countries.
“We hold this forum to express a clear message,” China’s premier Li Keqiang said during the forum. “China and Japan will not have destructive competitions in the third market. Instead, we want to create win-win opportunities and expand collaborations.”
Li also formally welcomed Japanese companies looking to invest and develop their businesses in China.
“We hope that through currency swap agreements and other agreements, we can strengthen our collaboration with Japan in the area of finance and consequently provide firm support for the collaborations between the enterprises from the two countries,” Li said during the forum.
Nomura and five other Chinese and Japanese financial services companies have signed a memorandum of understanding (MoU) about setting up a Japan-China industrial cooperation fund, according to an October 26 announcement by Nomura.
China Investment Corporation, Daiwa Securities, MUFG, Sumitomo Mitsui Banking Corporation (SMBC), and Mizuho also joined the agreement.
The fund will invest in Japanese companies seeking to expand their Chinese businesses and vice versa. It aims to enhance bilateral trade and investment relations between China and Japan, according to the announcement.
The establishment of the fund is subject to the execution of a final agreement and obtaining regulatory approvals.
SMBC also signed another three agreements, one with China Development Bank, another with the Export-Import Bank of China, and another with the China Export and Credit Insurance Cooperation.
The collaborations are in the areas of project finance, trade finance, asset-backed securitisation, and export credit insurance. These agreements are designed to strengthen ties between SMBC and Chinese banks to co-finance environmentally-friendly and energy-saving projects in Japan, China and other countries.
The HKMA has renewed the licences of nine authorised institutions as Primary Liquidity Providers (PLPs) for the offshore renminbi market in Hong Kong for another term of two years with effect from 27 October, following the expiry of their current two-year term of designation, according to an October 26 press release.
The nine banks are Agricultural Bank of China, Bank of China (Hong Kong), Bank of Communications, BNP Paribas, China Construction Bank (Asia), Citibank, HSBC, Industrial and Commercial Bank of China (Asia), and Standard Chartered Bank (Hong Kong). The renewal came after a periodic review.
The HKMA will continue to provide each of the PLPs with a dedicated renminbi repo facility of Rmb2bn, helping them manage their liquidity when they carry out market-making activities in the CNH market.
Singapore has launched a new government agency, Infrastructure Asia, to make infrastructure projects in Southeast Asia bankable, according to an October 23 press releaseby Enterprise Singapore, the Singaporean government agency for enterprise development.
The new agency will be led by the Monetary Authority of Singapore and Enterprise Singapore. It will connect different industry players across the infrastructure projects, development banks, and the public sector.
Officially launched during Enterprise Singapore’s 8th Asia-Singapore Infrastructure Roundtable, Infrastructure Asia has already signed two Memoranda of Understanding with the World Bank and the Singapore Business Federation.
“We will also offer advice to relevant countries and work with them on capacity building,” Seth Tan Keng Hwee, executive director at Infrastructure Asia, said in the press release. “With better knowledge, skills and resources, we can improve project feasibility and bankability, enabling project leads to become viable commercial projects.”
Asia faces an investment gap of $460bn annually for infrastructure, according to the press release.
Infrastructure Asia will focus on connecting partners and kick-starting collaboration, sharing knowledge or conducting training sessions in the markets with infrastructure projects, and ultimately helping to improve the bankability of projects, according to the press release.
The Central Bank of the Philippines and other Philippine banks are to sign an MoU to authorise renminbi trading in the country, according to a local media report on October 25.
The central bank’s exposure to renminbi is currently limited to money market instruments and the Asian Bond Fund, initiated in 2002 by the executive meeting of East Asia-Pacific Central Banks to broaden domestic Asian bond markets.
Since the Philippine central bank included renminbi as part of its foreign reserves in October 2016, renminbi assets are its fourth largest pool after those in dollar, IMF special drawing rights, and gold, according to the report.
Currently, 14 local banks have partnered up with Bank of China Manila for renminbi trading.
Although renminbi transaction growth is not expected to be strong in the near term, Deng Jun, Bank of China country head for the Philippines, believes that the multi-currencies/peso pairs trading market will soon appear in the Philippines. He also encourages Chinese and Philippine businesses to use renminbi rather than a third currency for transactions between them.
As the Shanghai pilot free-trade zone (FTZ) in China reaches its fifth anniversary, president Xi Jinping, premier Li Keqiang, and vice premier Han Zheng all issued statements on the future of FTZs during a high-level forum in Shanghai, according to a report by Xinhua on October 24.
China will have 12 such zones across the country by 2020, when Hainan becomes the newest member.
While Xi repeated the call for building the country's pilot free trade zones toward new heights of reform and opening-up in the new era, Han struck a different note.
He focused on the importance of treating FTZs as “the high ground for regulatory reforms” rather than “low ground for preferential regulatory treatments”. Therefore, it is crucial for FTZs to explore and establish more innovative regulations that can be copied and developed in other provinces.
China’s Ministry of Commerce highlighted data regarding Belt and Road Initiative (BRI) projects for the first three quarters of 2018 in a statement on October 25.
Import and export value between China and One Belt One Road countries reached Rmb6.08tr, a 13.2% increase year-on-year (YoY). The growth rate of import and export related to the BRI is 3.3% higher than China’s overall growth rate of foreign trade. Chinese enterprises directly invested $10.8bn in BRI countries, a 12.3% increase over a year earlier.
The first China International Import Expo in Shanghai is starting in a week. Nearly 180 American enterprises have registered for the event, the Ministry of Commerce spokesperson, Gao Feng, told the media during an October 26 press conference.
These enterprises, Gao said, are mostly in the high-end manufacturing, intelligent equipment, agricultural products, and sports and recreation industries.
That makes America the third largest guest to the forum, even after a spokesperson at the US Embassy in Beijing said that the US would not send senior officials to the expo.
During the press conference, Gao also promised to facilitate the legislation of a “Foreign Investment Law”, a set of rules that had been out in public for suggestions since January 2015. At the end of last year, the draft was submitted to the State Council.
Trading volume in SGX USDCNH futures reached $47bn in September, up 68% YoY but down 27% month-on-month (MoM), according to a note on October 26 from Singapore Exchange.
Despite the drop in September, trading volume in SGX USD/CNH for the first three quarters in 2018 was $366bn, a robust growth of 93% over the full year volume of $191bn in 2017.
The decline in renminbi volatility in September affected the SGX USDCNH trading volume as the average daily volume in September dropped to US$2.47 billion from US$2.81 billion in August.
“Public support from the central bank and the slew of measures announced since August have also implied that, in the short term at least, the risk of the renminbi weakening past 7 against the US dollar may be limited,” SGX wrote in a note. “As a result, the USDCNH moved in a narrow range for the most part in September.”
The Hong Kong Exchanges and Clearing saw similar trends. The number of HKEX USDCNH futures contracts reached 7,408 in September, down 31% MoM but up 87% YoY.
“Speculation over a CNH liquidity squeeze to defend the CNH spot [rate] retreated as the PBoC reiterated that China would keep the RMB at the reasonable and equilibrium level,” Ken Cheung, senior Asian FX strategist at Mizuho, wrote in an October 24 note. “The PBoC remains comfortable with the RMB exchange rate hovering at above the 6.9 handle as long as RMB expectation is well anchored.”
Pan Gongsheng, PBOC’s vice governor, warned short sellers of the renminbi, during an October 26 State Council briefing. Pan repeated that China will not competitively devalue its currency and the central bank is confident that the renminbi exchange rate will remain stable at a reasonable level.
“If you compare the renminbi with other currencies, no matter in terms of developed countries’ currencies or emerging market currencies, the renminbi is still a relatively stable currency,” Pan said during the briefing.
Pan also said that the government has taken measures to stabilise the currency market. He added that other factors such as healthy economic fundamentals, a stable macro leverage rate, and ample foreign reserves will contribute to a stable renminbi rate in the long term.