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Offshore RMB Poll: Twelve questions for the RMB market

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By Carrie Hong, Paolo Danese
24 Apr 2015

As part of this year’s Offshore RMB Poll, we surveyed participants on 12 of the most important topics related to the RMB’s global journey. About 1,000 responses were received for the questions, which ranged from assessments of the pace of internationalisation progress to the size of the RMB trading band. We present the results below.

How many new RMB hubs do you expect there to be in 2015? (Total responses: 982)

RMB pie 1After last year’s flurry of offshore RMB hub designations, either through the appointment of official clearing banks or the awarding of an RQFII quota, the market’s expectations for China’s central bank to continue the trend seem modest.

A total of eight hubs — UK, Germany, France, Luxembourg, Qatar, South Korea, Canada and Australia — were set up during the period from June to November 2014. Given that three more countries — Thailand, Malaysia and Switzerland — also got that status in January 2015, just before our survey was conducted, it means that more than 65% believe that only two more hubs will emerge later this year.

That could prove correct, as the current hubs (including the likes of Hong Kong, Taiwan and Singapore) have already covered many of the world’s major financial centres. Other remaining possible destinations could be Eastern Europe/Central Asia, Africa, as well as another spot in the Middle East, particularly given China's “One Belt & One Road” programme. The UAE, Hungary and Mauritius are believed to be hot candidates.

How many new CNH bonds from sovereign issuers will there be this year? (Total responses: 974)

Excluding China's Ministry of Finance dim sum auctions, one sovereign (the UK) and two sub-sovereigns (British Columbia and New South Wales) were seen in last year’s offshore RMB bond market, and the survey shows the market is holding a similar expectation for this year.2

Market observers typically reckon that newly appointed RMB hubs would be the most likely potential sovereign issuers in CNH. Being the first non-Chinese central government tapping the CNH bond market, the UK was quick to follow up the designation of an official clearing bank in June 2014 with a Rmb3bn sovereign issue in October.

Since almost 67% of respondents reckoned that 2015 will see between one and five new RMB hubs, there is a big chance more sovereign names could be seen in the market this year either to further promote their local RMB market or to send a signal that they are interested in becoming a new hub. And the presence of sovereign names in the market is widely seen as helping to pave the way for RMB funding for corporates.

Do you expect the RMB to be included in the IMF's Special Drawing Rights basket in this year's review? (Total responses: 1,031)

3Whether the renminbi can get into the International Monetary Fund's special drawing rights basket this year is widely seen as the weather vane of the extent of global acceptance of the currency.

Our survey reflects the general expectation: a little better than a 50-50 chance. The main concern is still full convertibility, as well as the smaller usage of RMB as an investment currency compared to the current SDR basket components. But many point out that China’s rapid and continuous capital account liberalisation, coupled with the RMB’s increasing popularity in international transactions, can serve as a strong argument for inclusion this year.

Assuming it is included in 2015, Société Générale recently predicted it would start with a 7% weighting, lower than yen (9.4%) and sterling (11.3%). But analysts at Bank of America Merrill Lynch estimate its potential weighting could be as high as 13%.

When do you think the RMB will be fully convertible? (Total responses: 1,048)

On this issue, the market clearly does not share the optimism of China’s central bank governor Zhou Xiaochuan, who said explicitly at several conferences in March that the government aimed to make the RMB convertible in 2015.4

More than 70% of respondents in our survey said it would take three to eight years to achieve this goal. But solid steps have been seen in promoting RMB internationalisation in 2014, and the government is not hiding its strong interest in getting the currency into the IMF’s SDR basket.

As a result many RMB analysts reckon this means China will at least open its capital account significantly in 2015. Premier Li Keqiang also said in his annual working report to the National People's Congress that “China will achieve RMB convertibility under the capital account”, so perhaps it will come sooner than many still expect.

Do you think the RQDII scheme will take off this year? (Total responses: 1,029)

5The People's Bank of China (PBoC) issued a set of rules for the RMB-denominated qualified domestic institutional investor (RQDII) scheme in November last year. It’s not surprising that around 24% of respondents don’t think the new initiative will take off this year, but it is unexpected that the biggest group of respondents — 41% — don't know what it is, given that the market has been looking for more capital account liberalisation from the onshore market.

The scheme can be seen as an updated version of the existing QDII programme, minus the FX risk and without quotas, as it will be approved on a case by case basis.

The goal is to expand two-way cash flow channels and facilitate offshore RMB investment for sophisticated Chinese investors looking for portfolio diversifications and risk management. So far, only UBS (China) has officially launched a RQDII fund related to high yield credit-linked notes issued in North America, while several other firms are preparing for similar products.

When will the RMB achieve reserve currency status? (Total responses: 1,050)

First of all, the good news. Only 2% of respondents believe the RMB will never achieve reserve currency status. That, in fact, correctly reflects the reality. As a recent HSBC study showed, there are dozens of central banks already holding RMB assets and many reserve managers see the RMB taking up as much as 10% of their total reserves by 2025.6

This aligns perfectly with our survey results, with nearly half of respondents pointing to the next five to ten years as the timeframe for the RMB to achieve some sort of official reserve currency status.

Will China widen the RMB's trading band in 2015? (current: +/- 2%) (Total responses: 1,041)

The People’s Bank of China doubled the RMB’s trading band in mid-March 2014 from 1% to 2%. Just over a year later, the market appears to expect such expansions to continue, with respondents to our survey overwhelmingly seeing a widening of at least 3% as likely.

7The promise made by People’s Bank of China governor Zhou Xiaochuan in March of full convertibility by year-end put a tight deadline on a move with potentially vast implications for China’s slowing economy. Nonetheless, before full convertibility is achieved, an increase in the trading band would be a logical step.

An increase in the band would recognise the increasing costs associated with a constrained exchange rate when external and domestic economic conditions are shifting. The decrease in China’s foreign exchange reserves – down $113bn in Q1 2015 to $3.73tr – are indicative of the challenge. In addition, China’s desire to be seen as more fully integrated in the global financial markets will point to the same endgame: time to let the RMB go free.

How much will Stock Connect northbound daily trading pick up by this year? (Total responses: 971)

The Shanghai-Hong Kong Stock Connect promises to be the much-trafficked bridge that lets hordes of under-exposed foreign investors gain access to the Chinese stock market, at least according to HKEx chief Charles Li. That may be the long term plan but, since its launch in November 2014, things have been rather subdued, at least so far.8

For the northbound channel that lets buyers access Shanghai-listed companies, performance has grown, although slowly. After an explosive debut, net daily usage of the Rmb13bn quota has averaged only 11%. However, possibly as a result of the massive surge in the Chinese market over the past year, daily turnover – combining buy and sell orders – has been more substantial, averaging Rmb5.8bn on a daily basis and growing to an average Rmb9bn between April 1 and April 20.

The fact that Shenzhen stocks are likely to join the Stock Connect scheme could well help make our respondents’ majority prediction come through. Should that be the case, we could see the programme reach its potential before long.

Which region do you expect to be the most active for RMB business in 2015? (Total responses: 1,031)

9Hong Kong’s status as the leading offshore hub for trade and investment in RMB is well known. But it is surprising to see that despite Chinese authorities’ push to establish and promote offshore RMB hubs as far as Doha and Toronto in 2014, market participants still see East Asia as where the action will be in the offshore RMB world in 2015.

However, if the first quarter of the year is any indication, that bet is likely to pay off, even without taking into account Hong Kong. In Taiwan, RMB deposits have gone up by nearly 20% in a year. Even more noticeably, Rmb13bn out of Rmb25.3bn of total offshore RMB bond issuance by mid-April 2015 have been Formosa bonds issued in Taiwan by a wide range of international FIs and corporates.

South Korea has also seen big growth, with RMB deposits more than doubling between March 2014 and March 2015 and local institutional investors pressing to enter the RMB qualified foreign institutional investors (RQFII) programme. Since South Korea received its RQFII
Rmb80bn quota in July 2014, nearly a quarter had already been distributed to ten firms by the end of March 2015.

What will be the volume of public syndicated offshore RMB bond issuance in 2015? (2014: Rmb198bn, excluding MoF auctions) (Total responses: 930)

After a banner year in 2014 for offshore RMB bond issuance, a majority of respondents forecast the market in 2015 will be as good as last year’s, or even better. Banks’ earlier estimates for this year’s gross issuance of CNH bonds (including certificates of deposit) were unexciting, with HSBC predicting a drop and Standard Chartered say this would be perhaps 10%.10

And indeed the year did not start well. Away from the fired-up Formosa market, where there have been 21 deals, there were only nine other offshore RMB bonds by the end of April. But analysts have recently noted the strong FX rebound since mid-March, guided by the PBoC fixing. Offshore rates have finally started to decline towards levels favourable for issuers, and SDR inclusion could also help.

Last but not least, CNH liquidity is getting a lift from increasing outbound portfolio flows after policy relaxations in relation to the Shanghai-Hong Kong Stock Connect. With the help of the sustainable southbound flows to Hong Kong, and the recent 100bp RRR cut in the onshore banking system, confidence in the CNH bond market will gradually be restored.

How high do you think the RMB will be ranked in Swift's most used currencies worldwide by year-end? (currently 7th) (Total responses: 991)

11Throughout 2014 the renminbi was on a clear trajectory to crack a top five position in the rankings of most used currencies for payments around the world. The redback did achieve that result in January 2015, with a 2.17% share of global volumes. However, it fell back to seventh position just a month later, with Swift pointing to the seasonal effect of Chinese New Year as the leading cause.

Be that as it may, our respondents seem keen to exercise some caution, with the largest proportion of them seeing the RMB proceed no further than its January standing by year end. It is not hard to imagine the cause of that caution: as the RMB has stopped its one-way appreciation, Chinese sellers have been less keen to receive their home currency from foreign counterparties, while at the same time foreign buyers have become less keen to accumulate RMB now that its upward trajectory has been stumped.

Optimism never dies, however, and the second most popular response tells us we could yet see the RMB surprise on the upside.

How much new RQFII quota will be approved in 2015? (Total responses: 949)

The year 2014 was a record one for RMB’s internationalisation in many ways, including the momentous expansion of the RMB qualified foreign institutional investors programme (RQFII). That initiative was unique, in particular before the launch of the Stock Connect, as it was the primary channel for multi-asset class investment of offshore RMB back into the Chinese capital markets.12

The programme is managed in tandem by the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign exchange (Safe), with the former granting licences and the latter setting the quota limits for individual investment firms. Throughout 2014, Rmb140bn of new quotas were distributed, with the programme reaching Rmb330bn in quotas spread across 111 institutions by March 2015.

A majority of our survey participants seem to believe that 2015 will set a new record, with at least Rmb150bn being added. Considering the number of RQFII-enabled jurisdictions has gone from three to nine last year, that looks a likely outcome.

By Carrie Hong, Paolo Danese
24 Apr 2015