CNH Market--A Burgeoning Offshore
RMB Market
Liu Chenggang from Bank of China
September, 2011

Contents

I. Evolution of CNH Market
II IntroductionII.
I t d ti off CNH MMarketk t
III. Future Development of CNH Market
IV. Bank of China’s Participation in CNH Market

I. Evolution of CNH Market

Evolution of CNH Market

International trade volume of China exceeded USD3,000 billion in theyear of 2010. The world’s largest trade balance surplus paved the way forthe expansion of CNY settlement in cross-bordercross border trade and direct
investment. As the CNY offshore deliverable market, Hong Kong provides
services such as international trade settlement in CNY, financing, CNYdenominated bond issuance and wealth management.
management

Evolution of CNH Market
1. Retail CNY Banking Businesses：
In December of the year of 2003, retail CNY banking businesses waspermitted in Hong Kong, but only in CNY deposit accounts, CNY remittanceand CNY credit card. And the amount for converting HKD to CNY limited toCNY20,000 per day
day.

2. Dim Sum Bond Market：
On June 8th, 2007, People’sp
Bank of China ((PBOC)) and National
Development and Reform Commission (NDRC) jointly issued The Interim
Measures for the Administration of the Issuance of RMB Bonds in Hong
Kong Special Administrative Region by Financial Institutions Within theTerritory of China 》(中国人民银行 国家发展和改革委员会公告【2007】第12号). In July of 2007, China Development Bank became the first issuer in
CNY-denominated bond, with a amount of RMB5 billion and a tenor of 2years.

Evolution of CNH Market
2.Dim Sum Bond Market：
On Dec 8th8th, 2008
2008, General Office of the State Council issued Several Opinions
on Providing Financial Support for Economic Development （国办发【2008】126号）, allowing corporations and financial institutions with
substantial business in China to issue CNY bonds in Hong Kong.
On Feb 11st, 2010, Hong Kong Monetary Authority issued Elucidation ofSupervisory Principles and Operational Arrangements Regarding Renminbi
Business in Hong Kong,
Kong indicating “WithWith regard to the RMB funds that haveflowed into Hong Kong, Participating Authorized Institutions can develop
RMB businesses based on the regulatory requirements and market conditions inHong Kong, as long as these businesses do not entail the flow of RMB funds
back to the Mainland. ” and “The range of eligible issuers, issue arrangements
and target investors can be determined in accordance with the applicableregulations and market conditions in Hong Kong. “Evolution of CNH Market
3. Cross-border Trade Settlement in RMB
In July
July, 20092009, State Council approved Shanghai,
Shanghai Guangzhou,
Guangzhou Shenzhen,
ShenzhenZhuhai and Dongguan for the experimental RMB settlement of Cross-boarder
trade. On July 1st, 2009, PBOC and five other ministries released
Administrative Rules for Experimental RMB Settlement of Cross-boarder
Trade. (中国人民银行 财政部 商务部 海关总署 国家税务总局 中国银行业监督管理委员会公告[2009]第10号). On July 3rd, PBOC issued the Detailed
Measures for Experimental RMB Settlement of Cross-boarder Trade.
In June of 20102010, the experimental cities expanded to 20 provinces,provinces
municipalities and autonomous regions including Beijing with all cross-boarder
trade counterparties.
On Aug 23rd, 2011, PBOC and five other ministries released A Notice on
Extending Geographical Coverage of Use of RMB in Cross-border Trade
Settlement, to the entire nation.

Evolution of CNH Market

4 ODI in RMB
4.
In Jan, 2011, PBOC and SAFE jointly formulated and issued Measures forAdministration of Pilot RMB Settlement for Overseas Direct Investment.

II. Introduction of CNH Market

（I）Cross-border（I）Crossborder RMB Settlement Volume in Hong Kong
After the implementation of Pilot Programme of cross-border trade
settlement in RMB, we witness a rapid growth in cross
cross-borderborder RMB
settlement volume in Hong Kong. The total RMB settlement amountincreased to RMB205.1 billion in June from RMB153.4 billion of May. The
total amount of the year of 2010 is RMB369.2 billion, while the one for thefi t half
firsth lf year off 2011 isi RMB803.6
RMB803 6 billion.
billi
Th following
Thef ll i chart
h t illustrates
ill t tthe cross-border RMB settlement volume in Hong Kong since July of 2009.
(Source: website of HKMA)
Cross-border RMB Settlement Volume in Hong Kong (in RMB100millions)
2500
2000
1500
1000
500
0

（II）RMB Deposit in Hong Kong
Pilot Programme of cross-border trade settlement in RMB also increased RMB
deposit in Hongdeposo g Kong.
o g. According
cco d g too HKMA,, ass ofo June
Ju e ofo 2011,, RMB depositdepos inHong Kong amounted to RMB553.6 billion. The following chart shows the RMB
deposit in Hong Kong on HKMA’s website since April of 2009 on a monthly
basis. There is a sharp growth of 45.41% from RMB149.3 billion to RMB217.1
billi inbillion
i OctoberO t b off 2010,2010 4 months
th after
ft China
Chi extendedt d d theth experimental
it l cities
itiof cross-border settlement in RMB to 20 provinces.
RMB Deposit in HK (in RMB billions)
600
511

500
400

371300280217200100
53053545657585760636466

71818590104130 149

315408451549 554

（III）Offshore RMB funds investment channels
1. Deposit to Banks in Hong Kong
We take the RMB deposit interest rates of BOCHK on Aug 25th andthose of Bank of China Head Office. The interest rates for deposit in Hong
Kong range from 0.3-0.6%. （Note：BOCHK is a sole RMB clearing bank inHong Kong, and participant banks, (PB) deposit the excessive RMB toBOCHK. ）0.06

5年, 5.50%

0 05
0.05

3年 5%
3年,2年, 4.40%

0.04
1年, 3.50%

0.03

3个月, 3.10%

人民币存款利率表 香港市
6个月, 3.30%

场人民币存款利率表 内地市

0.02
0.01
0

场（整存整取）活期, 0.50%
0.30% 0.30%

0

活期

7天

0.50% 0.50% 0.55% 0.60% 0.60%

14天 1个月 2个月 3个月 6个月 1年

2年

3年

5年

（III）Offshore RMB funds investment channels
2. Investing in Dim Sum Bond Market—Total Issuance AmountDim Sum Bond refers to CNY-denominated
CNY denominated bond issued in Hong Kong.
Kong In July of
2007, the first Dim Sum bond issued by China Development Bank. as of Aug
25th, 2011, total issuance amount of Dim Sum bond is RMB202.5 billion, and theoutstanding amount is RMB176 billion. (Source: Bloomberg). Issuance in 2011
witnessed an explosive growth.
Dim Sum Bond Issuance CNY (in RMB billions)
140123.825

120
100
8060

40.68

40
20

10121620072008

2009020102011

（III）Offshore RMB funds investment channels
2. Investing in Dim Sum Bond Market—Tenor
In the total issuance amount of RMB202.5
RMB202 5 billion,billion the following chart showstenor distribution. (Data source: Bloomberg). Most of the dim sum m bonds’
tenors locate in 3 years, accounting for 87.58%, and indicates market’s tenor
preference.
Issuance Amount by Tenor CNY(in RMB billions)
90
80
70
60
50
4030
20
10076.95
67 93
67.93
1Y
2Y
3Y

32.47

5Y

18.61

1Y

2Y

3Y

5Y

7Y

3.35

3.2

7Y

10Y

10Y

（III）Offshore RMB funds investment channels
2. Investing in Dim Sum Bond Market—Issuer
There are several types of issuers,
issuers which are illustrated in the chart,
chart including
Ministry of Finance of Chinese government, foreign and Chinese banks andenterprises. Among the total issuance of RMB202.5 billion, sovereign accounts
for 17%, while financial institutions constitute of 51% with a total issuanceamount of RMB104.4 billion. （Data source：Bloomberg）
Dim Sum Bond Amount by Issuer CNY(in RMB billions)Enterprises,
64.082B, 32%
Sovereign

FinancialInstitutions,104.42B, 51%

Financial Institutions
EnterprisesSovee g , 334B,,Sovereign,17%

（III）Offshore RMB funds investment channels
2. Investing in Dim Sum Bond Market—Issuer (Financial Institutions)
Chinese banks issued RMB90
RMB90.68
68 billion
billion, comprised 87% of the RMB104.4RMB104 4
billion issued by financial institutions. Foreign banks account for 11%, and super
national issuers 2%, including Asian Development Bank, International FinanceCorporation and IBRD. (Data source: Bloomberg).
Financial Institutions Issuance Amount CNY (in billions)

Chinese Banks, 90.68,87%

Foreign Banks,
11.89, 11%

Chinese Banks
Foreign BanksMultinational

Multinational, 1.85, 2%

（III）Offshore RMB funds investment channels
2. Investing in Dim Sum Bond Market— Yield Analysis
Since offshore depositpamount is far larger
g then investment products,p, yyield ofDim Sum Bond is much lower than the domestic interbank bond market. (Datasource: Daily report on China bond website on Aug 26th, and market priceprovided by foreign banks) . The following chart demonstrates different yield ofChi
Chinesegovernmentt bondb d on andd off
ff shore.
h
4.50%
4.00%
3 50%
3.50%
3.00%
2.50%
2.00%
1 50%
1.50%
1.00%
0.50%
0.00%

3.55% 3.67%
3.09%

3.70% 3.67% 3.86%

3.92% 3.99%

3.29%
2.27% OFFSHORE
1.87%
1.15% 1.26%

0.25%
2M

6M

0.25% 0.40%
1YR2Y0.50%

3Y4Y5Y7Y

10YONSHORE

（IV）FX Spot and Forward Market
USD/CNH spot trading debut in Hong Kong on Aug 23rd, 2010. which isp tradingg and NDF.
different from onshore CNY spot
USD/CNH spot has premium compared with onshore spot CNY. The
following chart shows us the on and off shore spot rate and spread.

（IV）FX Spot and Forward Market
Major difference between CNH and NDF
1. CNH spot
p trades real-time thus doesn’t need an onshore fixingg reference,, different
from CNY NDF, which takes a spot fixing from the onshore CNY market at 11am
Beijing time;
2. CNH is deliverable in Hong Kong, while NDF is non-deliverable.
The following chart shows the CNH FORWARD，ON-SHOREFORWARD ON SHORE CNY FORWARD andNDF FORWARD CURVE.

（V）Interest Rate Swap Market

IInvestorst whoh buyb
fixedfi d ratet dim
di sum bond,b d haveha needd tot swap thethfixed rate to floating rate, thus emerged offshore CNH IRS market, taking
on shore 3m SHIBOR as a benchmark.

（VI）Cross Currency Swap
The CNH/USD CCS curve is inverted because of the market expectation for CNY
appreciation Investors of CNH bonds can swap the CNH to USD to get the yieldappreciation.
pickup. While most of the investors prefer to maintain their CNH exposure toenjoy further appreciation.

III. Future Development of CNH Market

Future Development of CNH Marketa.
b.
c.
d.
ee.
f.

Vice Premier Li Keqiang arrived in Hong Kong on Aug 16th, and announced
the ppolicies in a keynoteyspeechp
he delivered at the economic forum duringg
the day. And these measures cement Hong Kong’s status as internationalfinancial center, and to support Hong Kong in developing itself into anoffshore RMB center, including:E t d Cross-border
ExtendCb d tradet d settlements
ttl
t in
i renminbi
i bi tot theth wholeh l countryt
Pilot projects for foreign banks to replenish capital with renminbi will belaunched
Supportpp will be given
gto Hongg Kongg enterprises
pto make direct investment in
the mainland in renminbi.
A quota of 20 billion yuan for qualified Hong Kong investors to buy yuandenominated securities;
Expand the sale of yuan-denominatedyuan denominated bonds in Hong Kong and allow more
mainland firms to issue debt in Hong Kong.
Gradually increase the issuance amount of central government bond in HongKong.

Future Development of CNH Market

The isolationTh
i l ti off theth on andd off
ff shorehmarkets
k t createst theth difference
diffbetween the spot, forward and swap rates and bond yields. Theoffshore market is still in a developing progress, there is large room
for the liquidity and market depth to improve.
improve
And the measures announced by Vice Premier Li Keqiang also give
us direction of the development
pof offshore CNH market in HonggKong:
1. Improve the liquidity and market depth of offshore CNH market;
2. Open the channel for offshore CNH to go back to onshore, such as
RQFII etc.

IV. Bank of China’s Participation in CNH Market

Bank of China’s
China s Participation in CNH Market

 Bank of China (Hong Kong) Limited (BOCHK) is the sole clearing
bank in Hong Kong; BOCHK conducted the first RMB outward and inward remittanceunderd cross-borderb d ttraded settlement,ttlt andd alsol theth firstfi t tradet d finance;fi BOCHK did the first RMB business under cross currency agreement;
 BOCHK is the first bank to launch CNY HIBOR, which is abenchmark interest rate in trade finance and loan services we provide; BOCHK is the first bank to launch CNH spot and CNH DF and is thelargest market-make, i.e. we made one third of the CNH spot trading; BOC group takes the leading position in the RMB insurance market:
BOC group accounts for 60% of the number of insurance;
and accounts for 71% of the insurance amount.

Bank of China’s
China s Participation in CNH Market

 BOCHK is in a leading position in CNH bond market in Hong Kongas the originator of offshore RMB business.
 From the year of 2007 to the end of 2010, as primary lead andbookrunner BOCHK arranged issuance of 21 yuan
bookrunner,yuan-denominateddenominatedbond, with a total issuance amount of about CNY65 billion. AndBOCHK first launched offshore CNY bond index.
 BOCHK is the lead and book-runner of first Dim Sum bond issued byenterprise and super national institution.
 BOCHK performs multi-function in a debt issuance, such as lead,bookrunner,, market-maker and finance agent.
gIV. Bank of China’s
China s Participation in CNH Market

Most Important
pParticipant
pin Dim
Sum Bond
人民币（百万）中银香港安排发行

Mile Stone： First Dim Sum Bond（CDB in 2007）

其它400

 First Chinese Government Bond（Ministry of Finance,2009））350 First Corporate Dim Sum Bond（2010年，合和）300

 First Supernational Bond（ADB, 2010）250

 First publicly listed Dim Sum（ADB, 2010）200

 First to use bond auction platform in CMU( Ministry ofFinance, 2010)

150100 FirstFi dim
di sum bondb d issued
id byb european institutioni i i （ LLBANK, 2011）

50
02007

2008

20092010

 Dim sum bond issued by the largest multi-nationalcorporation (Volkswagen, 2011)

Bank of China’s
China s Participation in CNH Market
Bank of China actively participates in CNH market, including CD issuance andinvestment in Dim Sum bond.
bond
1. Bank of China issued Dim Sum Bond with the amount of RMB3 billion,
RMB 3 billion and RMB5 billion in the year of 2007/2008/2010 respectively,
and the bid/cover ratio reached 2.78, 5.16, 5.4。
2. Bank of China Hong Kong Branch added CNH into the issuance currencies inthe original CD Program, and launched CNH CD on May 18th, 2011. As ofAug 26th, total issuance amount reached RMB17 billion with a lowest
funding cost among the big-four
big four commercial bank.
bank
3. Bank of China Hong Kong Branch and BOCHK invest in dim sum bonds,
most of which are Ministry of Finance of Chinese government, policy banksand supernationals.
4 BOC H
4.
Hong KKong BBranchh iis readyd ffor CNH FX swap anddC
Cross C
Currency
Swap and will be more involved in CNH market.

Thank you!