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Accessing London RMB products and services
Disclaimer Accessing London RMB products and services is published by the City of London. This brochure is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this brochure, the City of London, authors and any addition organisations referenced herein, give no warranty in that regard and accepts no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein.
November 2015 Š City of London PO Box 270, Guildhall London EC2P 2EJ
Foreword CITY OF LONDON RENMINBI SERIES
The internationalisation of the renminbi (RMB) is one of the most important and exciting developments taking place in global capital markets. Since the launch of the City of London RMB initiative in April 2012, the UK has been at the forefront of this process. As well as industry commitment, policy discussions between both governments at the highest levels have been at the heart of this process, including President Xi’s state visit to the UK in October 2015, which highlighted the increasing importance of the Chinese economy and RMB market expertise. The result of these combined efforts has been the development of the UK as the leading western hub for RMB. Since 2012 we’ve seen RMB trade financing conducted in London double and RMB foreign exchange transactions increase by an astonishing almost 500%. Another measurement of this success is gained by taking a look at the broad use of RMB products and services by financial institutions and across the UK market. Building on the UK’s unrivalled financial expertise, a full range of products and services have been developed, from specialist RMB-denominated green and sovereign bonds, to export finance and advanced cash management services.
This booklet of case studies provides just a few examples of the RMB products and services in use in the UK market. I would like to extend my thanks to the contributors for sharing with us their experiences, which has enabled us to create a unique snapshot as to how London RMB products and services can be accessed to meet customer needs. This booklet is intended to encourage and inspire further developments. The UK recognises the importance of supporting innovation in this sector and remains committed to playing a major role in the internationalisation of the RMB. Domestically this means that we will continue to take the opportunity to build on market progress so far, supporting the development of a deeper and more sustainable market and making it easier than ever than ever to trade, settle, bill and invest in the RMB market in London.
Mark Boleat Policy Chairman, City of London Chairman of the Steering Committee of the City of London RMB initiative
Renminbi internationalisation FAQs
Q. What’s the difference between the renminbi (RMB), the yuan and ‘offshore’ renminbi? The renminbi (RMB) is the currency of the People’s Republic of China and the unit is the yuan. In this sense it is similar to the use of sterling (the currency) and the pound (the unit). The terms yuan and renminbi are often used interchangeably in the West. Offshore RMB refers to Chinese currency used outside of mainland China. This market was officially established in July 2009 as a way to test the liberalisation of the currency and to develop trade-related RMB flows between importers and exporters. The pseudo-currency code CNH was introduced to distinguish this offshore RMB pool from the onshore pool, known by the ISO currency code CNY. Q. Why does China want to internationalise the RMB? The Chinese government wishes to internationalise the renminbi for three main reasons: 1. To boost its position in regional trade. 2. To reduce the economy’s exposure to the volatility of the US dollar. 3. To reflect its global economic importance through the global status of its currency.
Q. What makes London the leading Western RMB centre? Since 2012 the UK’s volume of RMB-denominated business has increased exponentially, with foreign exchange transactions having risen 500% by the end of 2014 and RMB-denominated trade financing figures having doubled over the same period. The UK works collaboratively with key RMB centres globally and has proven itself to be at the forefront of market infrastructure developments, including becoming the first G20 nation to sign a bilateral currency swap agreement with China; issuing the world’s first non-Chinese sovereign RMB bond and providing the world’s first export credit agency guarantee for an RMB loan. Q. What are the main products and services offered to corporates in London? London has an extensive RMB corporate banking service offering including: o Corporate accounts; o Treasury management; o FX services; o Term deposits; o Payment and cash management; o Online facilities; o Trade services; o Supply chain services; and o Import / export financing.
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Q. What are the key benefits from using RMB denominated services and products? There are multiple benefits for corporates: o Using RMB acts as a natural hedge for corporates which have a two-way trade flow with China, thus reducing FX cost and risks. o The process for settling in RMB can be simpler compared to using the USD, as it removes the lag time involved in the necessary currency conversions that take place. o Using RMB for invoicing enables corporates to manage FX risk more effectively with the choice of both onshore and offshore FX rates available for merchandise trade with China. o If Chinese exporters invoice in RMB, this can improve price and cost transparency in the supply chain for overseas corporate buyers. In addition, offshore corporates can manage exchange and interest rate risks using the CNH market. o Using RMB can help to decrease the contract price by providing enhanced bargaining power by using RMB as the settlement currency. o Using RMB can lower the cost of financing and conversion. o Using RMB can help protect and grow existing business with trading partners in mainland China, as
Chinese companies would prefer to be paid in their currency to remove FX risks. Q. RMB products and services exist in many other jurisdictions – what is the advantage of accessing these in London? London is the world’s leading financial centre and is home to most of the major global financial institutions. As such, this extension of products and services available makes it easier for companies to manage their global cash pools from London, especially given the favourable time zone. The widening geographic access to RMB denominated products and services is an advantage in itself. Q. How do I open a CNH account in London and do any restrictions apply? The account opening process for RMB will follow the usual procedures for other foreign currencies. Offshore RMB accounts do not entail additional documentation. CNH can be held in current accounts, time deposits and structured deposits. Subject to bank approval, CNH cash accounts can be overdrawn, but any securities settlement must be pre-funded.
Q. Are there any requirements for transferring RMB between offshore and onshore accounts? RMB transfers are permissible if they are related to trade activity e.g. cross-border goods trade, service trade and other regularly performed trade settlement. There are other channels for transferring RMB between accounts, such as RMB direct investment, dividends payouts, shareholder loans and capital injections, which are not limited to trade settlement. Pilot schemes conducted within the China (Shanghai) Pilot Free Trade Zone have also given companies better cash management tools to perform cross-border cash pooling and sweeping. Q. What is the China (Shanghai) Pilot Free Trade Zone? The China (Shanghai) Pilot Free Trade Zone is a physical area in Shanghai and was established in September 2013 to serve as a test ground for local and national authorities to implement wide ranging policies on a stage by stage basis. Firms and financial institutions that locate to within the zone are able to make use of policies pertaining to a range of business and financial services that are not available to firms
located elsewhere in mainland China. For example, processes already in place offer simplified cross-border RMB transactions and some specific direct investment opportunities. Other free trade zones are in the process of being set up in China and further developments in Shanghai and new zones are expected. Q. Can I invest in China’s domestic bond and securities markets directly? A number of schemes provide limited access to China’s onshore capital markets, including: o Through the Qualified Foreign Institutional Investor (QFII) programme, foreign institutional investors can convert foreign currencies into RMB to invest in China’s capital markets. o The Renminbi Qualified Foreign Institutional Investor (RQFII) programme permits qualified RQFII holders to channel RMB funds raised outside mainland China (subject to a quota) to invest into mainland capital markets. o Central banks, supranational institutions and sovereign wealth funds can freely invest in China’s domestic bond market. o The Shanghai-Hong Kong Stock Connect permits members of each exchange to purchase a limited number of securities on the other, subject to a quota.
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Q. Are CNH bonds issued in London and how? Yes – overseas corporates can issue CNH bonds and this usually follows the same process as any other offshore bond transaction. The CNH bond market is an international bond market just like the USD and other bond markets. Bonds issued outside of China and denominated in RMB are sometimes known as ‘dim sum bonds’. April 2012 saw the first London dim sum bond issuance by HSBC and in November 2015 there were 39 dim sum bonds in total listed on the London Stock Exchange.
Adoption of the RMB by Luxottica Group S.p.A.
Context Luxottica Group is a leader in premium, luxury and sports eyewear with approximately 7,000 optical and sun retail stores in North America, Asia-Pacific, China, South Africa, Latin America and Europe, and a strong, well-balanced brand portfolio. House brands include Ray-Ban, the world’s most famous sun eyewear brand, Oakley, Vogue, Persol, Oliver Peoples, Arnette and REVO, while licensed brands include Bvlgari, Burberry, Chanel, Coach, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Prada, Tiffany and Versace. In addition to a global wholesale network involving 130 different countries, the Group manages leading retail chains in major markets, including LensCrafters, Pearle Vision and ILORI in North America, OPSM and Laubman & Pank in Asia-Pacific, LensCrafters in China, GMO in Latin America and Sunglass Hut worldwide. The Group’s products are designed and manufactured at its six manufacturing plants in Italy, two wholly owned plants in the People’s Republic of China, one plant in Brazil and one plant in the United States devoted to the production of sports eyewear. In 2011, Luxottica Group posted net sales of more than €6.2 billion. Additional information on the Group is available at www.luxottica.com
Luxottica has adopted a regionalised treasury structure with each treasury centre responsible for cash and FX risk management in their region. The regional treasury centres report into the Group Treasury based in Milan, the European HQ. Within China, the Group has two manufacturing facilities plus retail and wholesale operations. The Chinese subsidiaries import and export both raw materials and finished products to and from various group entities with the invoice currency primarily in USD, EUR and AUD. In addition to the inter-company transactions, various group entities have trade flows with third party suppliers in China again with the invoice currency being EUR or USD.
Adopting the RMB In 2010, the Treasury department undertook a thorough review of the FX flows worldwide with the objective of simplifying the invoicing process (and in particular the Chinese flows) in order to minimise the FX risk in particular regions and concentrate in others i.e. Europe. The reason it is preferred to concentrate the FX risk in Europe is down to the fact that the company’s primary manufacturing facility is based in the region and as it exports worldwide, this accounts for a significant percentage of the Groups’
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FX exposure. Historically, the treasury team based in this region has managed this FX risk. About the same time as the Treasury review, RMB internationalisation was gaining momentum, so Treasury started to look at the opportunities arising from this in relation to the flows with Chinese entities. It was decided that all inter-company flows with China would be re-invoiced in RMB. As part of the review and successful transition to the new invoicing process the Treasury team in conjunction with local finance teams mapped out all the relevant flows which would be affected by this change. A number of key departments were involved in the process starting with the fiscal and tax departments with particular emphasis on transfer pricing since they are key to the calculation and implementation of various price lists, the IT department who were not only charged with amending accounting systems but also billing/logistics systems et cetera. The Treasury team co-ordinated with all the relevant departments and local finance teams and the project was successfully completed in six months. As part of this process, the Treasury team in Europe opened a number of offshore RMB accounts in Citibank in order to collect and pay RMB and manage
the FX risk using spot and forward deliverable RMB contracts.
Adopting RMB has brought significant efficiencies for the Company: o Simplified the invoicing process relating to China and reduced the number of currency pairs being managed from three (AUD, EUR, USD) to one (RMB); o Simplified the hedging process by removing certain FX risk from China and concentrating this particular FX risk in Europe; and o There is also a greater natural hedge in place than previously.
Adoption of the RMB in the telecoms industry
Context Telecoms equipment and handset manufacturers like Telco – the representative but fictional example in this case study – recognise that they can only stand out in a tough sector by competing on an international scale. This increasingly means doing business in high-growth emerging markets like China and leveraging RMB to gain that vital competitive advantage. Telco, with its head office based in London, began life as a manufacturer of wire-line equipment for the Western European aerospace sector. Following the privatisation of national telecoms operators from the late 1980s, it refocused its business to supply carriers in Europe and the US. Telco has been an HSBC client for more than ten years, after finding that domestic banks could not match its international expansion strategy. HSBC’s global network supported its exports growth across new markets by supporting all Telco’s export invoices. Rolling waves of telecoms deregulation saw Telco and other suppliers enter the mobile handset market in the 1990s, attracted by the significant growth opportunities. The intense competition and tightening margins in equipment supply – not least the demand from emerging markets – saw Telco make its first trip to
China on a sourcing mission for basic components.
Building a business in China At the company’s request, HSBC relationship managers helped guide Telco’s entry into China by working with professional advisors in the Far East to design a tailored business structure and business strategy. The bank also nominated a local Chinese relationship manager to ensure its business would be well looked after in the market. With the RMB currency market closed at that time, Telco and other foreign businesses in the market were invoiced by Chinese suppliers in US dollars. Documentary Credits (DCs) and other trade instruments were also dollarbased. Despite the added exchange costs, Telco’s sourcing volumes grew and an ecosystem of Chinese OEMs developed to provide the company with full assemblies of components. Growing saturation in its home market of the mobile handset business – now the company’s main revenue stream – meant Telco needed to develop new growth markets among the BRICs. China clearly offered this growth, and the company’s key competitors were already entering the market. By 2002, China’s total market size equalled 64 million handsets, with penetration growing in double digits annually.
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RMB financing – expanding the business in China In 2003, Telco began mobile sales in China by acquiring a 50% joint venture stake in a Shanghai-based retail distributor advised by HSBC’s Advisory and Investment Banking team. The company also wanted to distribute in India but rising costs were eroding the competitiveness of its plant in Eastern Europe where phones were assembled. The solution was to start assembly of handsets in China for export and in 2005, Telco set up a wholly foreign-owned enterprise (WFOE) in Shenzhen Special Economic Zone to operate a manufacturing facility. To minimise withholding taxes on cross-border repatriation of earnings, Telco decided to finance both its joint venture and WFOE to the maximum extent practical with an onshore RMB loan from HSBC. This also served to reduce the build-up of trapped cash in China. At the time, Telco had also considered raising funds via synthetic CNH.
RMB hedging – strategic risk management US dollar prices were stable until 2005 when the Chinese Government allowed the RMB to appreciate from its fixed dollar peg. From this time Telco needed to manage its FX risks
to hedge margins in fixed-price supply contracts, as well as scheduled dividend and intracompany supply and interest payments. Non-deliverable forwards (NDFs) provided by HSBC were used to hedge the exchange rate to minimise the exchange risk and manage its cash flow more steadily.
RMB trade settlement Liberalisation of the RMB from 2010 with the establishment of an offshore market in Hong Kong and London gave Telco the opportunity to settle in RMB for trade. In its Chinese equipment sourcing strategy, the switch to RMB invoicing brought key benefits: o Better hedging: for future payments as well as the flexibility to exchange RMB back to other currencies when planning further expansion. o Better diversification: easing Telco’s strategic risk and portfolio management. o Better gains: both through Telco’s stronger relationship with its Chinese counterparts, and its accumulation of RMB for both onshore and offshore investment. o Better savings: through reduced exchange costs, less risk of currency fluctuation and a simpler administrative process.
Telco’s decision to invoice in RMB was taken in consultation with HSBC following a review of its current and future business strategy. Switching to RMB also reduced the uncertainties of exposure to the US dollar during a period of quantitative easing by the US Federal Reserve. Telco further decided to use RMB invoices combined with RMB letters of credit from HSBC as a tactical tool, helping it negotiate more favourable terms with new suppliers at a time when many competitors were still using US dollars.
RMB payments and cash management In 2010, Telco established a treasury centre in Hong Kong to make better use of their working capital through centralising operations, liquidity and risk management functions. Telco also had the added benefit of making payments to Chinese trade partner’s renminbi account based in China or offshore. HSBCnet ensured straight though renminbi payments to these trading partners. Savings were made by settling in local currency instead of US dollars, reducing their hedging requirements. By implementing a notional pool Telco were also able to minimise funding costs and maximise yield through the offsetting of RMB debit and credit balances.
RMB investment By 2011, Telco had built substantial balance sheet cash reserves amid the uncertain global climate. A board-level decision was made to increase overall weighting in RMB and underweight euro and US dollar due to the perceived risks in those regions. Telco decided to place the surplus cash on both onshore and offshore bank deposits, while also investing a portion of it for the short term in the HSBC Jintrust RMB money market fund – one which currently carries a net yield of 2.23% as of October 2012.
RMB re-financing – in offshore RMB market Telco had been looking at options to refinance its onshore RMB borrowing in the offshore markets, to take advantage of the lower financing cost on offer. It also needed capital to finance a new plant, and wanted to leverage the increasing liquidity in the offshore market. Another important consideration was whether Telco could internationalise the company’s investor base among Asian institutions, with whom the company’s brand was well known. With this in mind, Telco decided to issue an ¥500m offshore RMB bond. HSBC’s conversations with investors indicated there was capacity to raise ¥1bn at this rate, which was indeed
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the case when the company’s issue was two and one-half times oversubscribed in 2012. Some 70% of the issue was sold to investors based in Hong Kong, Taiwan and Singapore, with 30% sold to European private banks. Despite the development of the CNH/USD swap market that would have enabled Telco to effectively hedge this issue using a liquid, standardised instrument, they decided to keep the proceeds in RMB.
Disclaimer HSBC operates in various jurisdictions through its affiliates, including but not limited to, HSBC Bank plc, authorised and regulated by the Financial Services Authority, The Hongkong and Shanghai Banking Corporation Limited, HSBC Securities (USA) Inc., member of NYSE, FINRA and SIPC, and HSBC Bank USA, NA. The products and services mentioned herein are only available in jurisdictions where the respective issuers are authorised to operate and the material is not intended for use by persons located in or resident in jurisdictions which restrict the distribution of this material. The information in this article is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained herein without obtaining specific professional advice. This article has been prepared by HSBC Bank plc. Whilst every care has been taken in preparing this article, HSBC Bank plc does not make any representation or warranty (express or implied) as to the accuracy or completeness of the contents herein. Under no circumstances will HSBC Bank plc or any member of the HSBC group be liable for any loss caused by reliance on any opinion or statement made in this document. The information contained in this article were assembled in October/November 2012 and were based on the law enforceable and information available at that time.
China Construction Bank (CCB) London
Context China Construction Bank (CCB), headquartered in Beijing, is a leading large-scale joint stock commercial bank in Mainland China with worldrenowned reputation. With 14,856 branches and sub-branches in Mainland China, CCB provides services to 3.48 million corporate customers and 314 million personal customers, and maintains close cooperation with the leading enterprises of strategic industries in the Chinese economy and a large number of high-end customers. At the end of 2014, CCB’s market capitalisation reached US$207.9 billion, ranking fourth among listed banks in the world.
CCBL, Your RMB Clearing Bank in London China Construction Bank (London) Limited (CCBL) is a wholly-owned subsidiary of CCB. Since establishment in 2009, business development in London is pivotal for CCBL, particularly the RMB business. CCBL is the first Chinese bank in the UK to issue RMB-denominated bond and is also the first financial institution in the UK to receive and hold RMB capital. CCBL was appointed as the RMB clearing bank for London on the 18th June 2014. It was the first time such a title has been granted outside of Asia. CCBL officially launched its RMB
clearing service on the 29th July 2014. Working from the London time zone, CCBL has the advantage of connecting London with Asia, Europe & the US providing a single access platform and a 24 hour service and payment model allowing London to become a focal point for RMB clearing as well as the primary RMB liquidity provider outside Asia. It will be an opportunity for London to become an offshore hub for RMB business. As the RMB clearing bank, CCBL is permitted to access onshore FX and Interbank markets and can offer competitive rates to the Participants. As such, CCBL offers a full range of RMB Treasury products and liquidity support to the Participants. During last 12 months of established operations, there has been a positive response. By the end of August 2015, 49 financial institutions around the world have become Participants of CCBL clearing bank activity and more than 57,000 transactions have been processed with the total clearing volume exceeding 4 trillion Yuan.
Plans for the future development In addition to the subsidiary, CCB also opened its London Branch (CCBLB) in February 2015. This allowed CCB to further increase the volume of business in the UK, which is another
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demonstration of its long-term commitment to the UK market. In the near future, CCBL aims to increase the breadth and depth of the offshore RMB market in London and promote international use of RMB currency. CCBL will leverage the unique advantages of having both, a RMB clearing bank and a UK branch licence, embracing every opportunity to proactively expand the RMB service channels in the UK. CCBL will establish the integrated platform interlinking onshore and offshore RMB markets and take a leading role in innovation for RMB products.
Disclaimer: The information in the presentation is provided for general reference purposes only. Whilst every effort is made to ensure that the presentation is up to date and accurate, China Construction Bank (London) Limited and China Construction Bank Corporation London Branch do not warrant, nor do they accept any responsibility or liability for, the accuracy or completeness of the content or for any loss which may arise from reliance on information contained in this presentation. Unless otherwise stated the copyright and any other rights in the contents of the material available through our website, including any images and text, are owned by China Construction Bank (London) Limited and China Construction Bank Corporation London Branch. This presentation is only for the addressee. It is confidential and may be privileged information. You must not copy, distribute, disclose, rely or use any of the information in it. This presentation is neither an offer nor the solicitation of an offer to sell or purchase any investment.
Cross-border RMB settlement
PBoC circular 168 On 10 July 2013, The People’s Bank of China (“PBOC”) released a new circular regarding the simplification of RMB cross-border business processes (“the Circular”). The regulatory changes are aimed at making cross-border RMB transactions easier for corporates and to encourage the adoption of RMB for both current and capital account usage. The Circular introduces, amongst other changes, significantly simplified processes in relation to RMB crossborder trade settlement and crossborder lending. Counterparties can now settle cross-border trade in RMB and process payments and collections prior to providing supporting trade document, as is still required for trade settled in USD. Settling trade in RMB therefore shortens Days Sales Outstanding and also leads to operational efficiencies, such as centralised FX risk management. Through the release of the Circular, RMB cross-border lending is no longer a pilot programme, but available across pan-China. The increased flexibility provides corporates with an opportunity to optimise the management of their surplus RMB cash in China. Companies can lend their excess RMB out of China to
optimise the use of their liquidity. A number of multi-national corporates have taken advantage of the increased flexibility already. Nokia Solutions & Networks (NSN) China’s RMB cross-border lending structure outlined below, fully leverages these changes.
Cash concentration and centralised cash management NSN China has successfully completed a RMB2.5 billion (USD408.36 million) cross- border lending deal following the release of Circular 168. The RMB cross-border lending deal enables NSN China to lend within the quota of RMB2.5 billion to their offshore related companies with a tenor of one year. Through this loan, NSN China can include the RMB into its portfolio of working capital currencies to better manage their global liquidity positions and streamline its treasury operations. The Company has converted the RMB offshore in order to use the proceeds of the RMB cross-border loan at Group level.
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Key FAQs on Circular 168 Who is eligible? Onshore companies can lend RMB funds that are collected from related companies in China to overseas borrowers. The lending can be based on a single account or cash pool structure. The borrower offshore can be a related as well as a third-party entity. Is regulatory approval required? No, the programme is available across China since the release of the Circular in July 2013. Cross-border lending transactions can be processed by financial institutions based on the customary client due diligence procedures. How is the maximum loan amount determined? There is no prescribed formula to determine the lending amount however, the lending has to be commercially viable, i.e. not negatively impact the lender’s business onshore. Are there any requirements on the loan structure? Interest rate, tenor and lending purpose are negotiable and not subject to formal approval, but should make commercial sense and be in line with business practices. The
repayment of the loan at maturity must not exceed the total amount of loan principal, interest, taxes and any applicable transaction fees. What is required to execute the transaction? A special RMB account must be opened in the name of the lender to monitor both lending and repayment. Documentation requirements will vary depending on the bank assisting with the transaction. A loan agreement will have to be executed between the lender and the borrower in order to document the terms of the loan. Any other considerations? Corporates will need to take into account tax considerations when implementing the RMB cross-border lending structure. In addition to income tax, the lender typically has the obligation to pay Business Tax and Local Tax. Lender and borrower should consult their tax advisors and respective tax authority to verify the appropriate tax treatment.
Transaction Structure
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“RMB cross-border lending opens a channel for the movement of onshore RMB liquidity offshore. The circular announced by PBOC offers corporates increased liberty and flexibility when conducting business transactions in the RMB. Through cross-border lending, we achieved centralised management and effective use of funds at the group level, and significantly reduced finance cost. We look forward to continued introduction of policies that bring about greater convenience for enterprises doing business in and with China.� Johnny Ho, Head of regional treasury centre, Greater China and Japan,Nokia Solutions & Networks (China)
Building a CNH Hub
Global Opportunity “The RMB story is not just a Hong Kong story. In fact it’s not even a China story. It’s a global story. Competition has always been the key driver for innovation and growth. It is during times of intense competition where Hong Kong shines brightest.” Ms Alexa Lam then Deputy CEO and ED, Securities and Futures Commission, HK Hong Kong, Singapore, Taiwan, the United Kingdom and Luxembourg among others have all contributed to the spreading influence of the RMB, along with concerted efforts by Chinese policymakers to internationalise the currency. The establishment of swap arrangements between the PBOC and other central banks has been a critical step towards internationalisation. To date, the PBOC has signed RMB-denominated bilateral swap agreements (BSAs) with 32 foreign central banks totalling RMB RMB 3.2 (USD 496bn) According to the latest BIS data the RMB is now the ninth most traded currency against the USD in the $5 trillion a day global FX market – behind the Canadian Dollar and the Mexican Peso. BIS puts onshore (PRC) FX trading volumes at $44bn (which could include small quantities of other
currency pairs besides CNY), so global RMB trading is estimated to be roughly maximum 1/3 onshore and 2/3 offshore while offshore RMB Bond issuance totalled $56.6bn between 2010 – 2014.
What has ICAP done ICAP CNH Hub is a currency specific eCommerce portal which pulls together offshore Chinese renminbi (CNH) data from various services within the ICAP Group to offer a single, consolidated and holistic view of the market. Incorporating CNH data from Global Broking, EBS Brokertec and ICAP Information Services (IIS), the ICAP CNH Hub covers all related asset classes including: fixed income, interest rates and FX. The portal also streams renminbi specific market news, futures pricing and clearing data and in time will include equity derivatives, energy and commodities data and regulatory updates. Customers will be able to trade CNH through the platform in due course by means of ICAP’s session-based matching offering Through Shanghai CFETS-ICAP International Money Broking Co., ICAP’s partner in mainland China, the company plans to add onshore Chinese renminbi (CNY) data to the
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ICAP CNH Hub, derived from the Global Broking business. The ICAP CNH Hub is accessed via the ICAP Global Broking eCommerce portal, for all products and services. Launched in 2013, the eCommerce portal has established a customer base of more than 1,000 users from over 100 institutions globally across multiple asset classes. This is the first time that the eCommerce portal has pooled information from the wider ICAP businesses.
Renminbi support – Historic currency boost
Thanks to the work of UK Export Finance, Chinese buyers of UK exports can now access UK governmentsupported loans in their own currency. Important currency The UK government shares the City of London’s ambition to make London the world’s leading centre for offshore Renminbi (RMB) business outside China. The RMB has in recent years overtaken the euro as the second biggest trade finance currency after the US Dollar.
The first to benefit from UKEF’s support for RMB loans was Airbus, which supports 100,000 jobs in the UK. With UKEF’s help, their Chinese customer, the airline China Southern, was able to access from HSBC a 12-year UKEFguaranteed loan in RMB, which they used to purchase a new A330 aircraft. This was attractive for the airline as 97% of its revenues are in RMB.
Opening the door UKEF Underwriter, Hannah Steadman, explains how the support took shape:
So when UK Export Finance (UKEF) agreed to provide guarantees for export transactions denominated in RMB, the Chancellor Osborne announced the news as “a huge boost for UK businesses looking to export to China”.
“We have already provided support for export transactions in a range of local currencies, including Thai Baht, Japanese Yen and Malaysian Ringgit. These currency options help to insulate buyers who receive a significant proportion of their revenues in their own currency from foreign exchange risk. The RMB is different because prior to 2009 it was not convertible and its use was restricted outside mainland China”, Hannah says.
This is a truly historic deal which paves the way for the best British companies to export much more easily to the Chinese market.” Chancellor of the Exchequer, The Rt Hon George Osborne MP
“However since then, China has been working to internationalise the RMB. Now there is an offshore traded RMB that is fully convertible and unrestricted, and it has become an important international trade currency. It took a lot of work inside
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UKEF, with support from HM Treasury, the Bank of England and our partner export credit agencies, to get to the point where we could support a RMB transaction. We needed to consider how the currency would work with our guarantee and the length of the financing, which broke new ground in international funding in RMB”. This work has opened the door to future export business being supported by UKEF in RMB, Hannah says. The flexibility on the loan currency will help make it more attractive for Chinese companies from any sector, and companies outside of China that generate revenues in RMB, to buy from companies operating in the UK. Announcing the support for Airbus and China Southern, the Chancellor reflected on the scale of this new opportunity. He said: “This is a truly historic deal which paves the way for the best British companies to export much more easily to the Chinese market. The UK is a world leader in financial innovation and I am determined that we become a centre for RMB business, so that many more of our brilliant exporters can benefit.”
Our support for a Renminbi denominated loan is the first by an export credit agency anywhere in the world and paves the way for enormous opportunities for UK exporters and companies in the supply chain. It shows our determination to be among the most innovative export credit agencies in the global marketplace.” David Ludlow, head of international business development, UK Export Finance
David Ludlow Head of international business development UK Export Finance +44 (0)20 7271 8122 david.ludlow@ukef.gsi.gov.uk Find out how we can help your business +44 (0)20 7271 8010 customer.service@ukef.gsi.gov.uk
Ashmore Group: fast track RQFII in a competitive market
Context Ashmore is a prominent investment manager specialising in emerging markets, which have been its primary area of activity for more than twenty years. The company has been independent since 1999 and as of 30 September 2015 managed US$51.1bn in, segregated accounts and structured products. Ashmore offers a number of investment themes including External Debt, Local Currency, Corporate Debt, Blended Debt, Equities, Alternatives (incorporating distressed debt, private equity and real estate) Overlay/Liquidity and Multi-Strategy. The company’s investment products have won numerous awards and rankings by major rating agencies, including Lipper and Standard & Poor’s. Its investors are diverse and include: central banks, government and corporate pension funds, institutions and high net worth individuals. The China Securities Regulatory Commission (CSRC) granted Ashmore a QFII licence in 2009 and in 2014 it was the first investment manager outside mainland China to be awarded an RQFII licence by the CSRC . As a leading investment manager specialising in emerging markets, the
extension of China’s RQFII1 scheme to London was a major opportunity for Ashmore Group. However, a key competitive differentiator for the group would be how quickly it could seize this opportunity when a large number of other investment managers would also be submitting applications. A combination of preparation, agility and close collaboration with HSBC proved the solution.
Business Challenges Adjustments to the rules of the QFII2 scheme since its inception have significantly increased its flexibility and attractiveness for foreign investors. Nevertheless, the introduction of the RQFII scheme in 2011 and its subsequent refinements represented a potentially even more important opportunity for emerging market investment managers such as Ashmore. This went beyond the benefit of being able to use renminbi held outside the mainland. Revisions to the RQFII rules in March 2013 included the relaxation of the restriction on asset allocation between equities and bonds and the expansion of permitted investments to include stock index futures and fixed income products traded on the inter-bank bond market. 1 R enminbi Qualified Foreign Institutional Investor 2 R enminbi Qualified Foreign Institutional Investor
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QFII
RQFII
The Qualified Foreign Institutional Investor (QFII) scheme allows certain foreign entities to use offshore foreign currency to invest in the Chinese mainland’s securities market. The scheme was created in 2002 to enable foreign institutional investors with long-term investment horizons to tap the China domestic A-share and inter-bank bond markets, with approximately 170 QFIIs being approved over the succeeding decade. Nevertheless, QFII activity initially only accounted for a small percentage of China A-share activity, so SAFE and CSRC made substantive revisions to the QFII rules in late 2012 and quotas were appreciably increased in 2013, with USD850mn allocated in February alone. As of January 2014 there were 258 approved QFIIs with a total approved/available quota of USD51.4bn/USD98.6bn.
The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme is an adaptation of the QFII scheme that is also more flexible in terms of asset allocation. It permits licensed entities to deploy renminbi (as opposed to foreign currency) held outside the Chinese mainland into the mainland’s securities market. The first investment quota of RMB20bn was granted under the scheme to Hong Kong subsidiaries of various Chinese fund managers in 2011. Since then, in addition to the significant relaxation of the RQFII rules in March 2013, investment quotas under the scheme have also increased. For example, as of January 2014 a total of 66 Hong Kong RQFIIs had been approved with a total quota of RMB 167.8bn.
As a result, HSBC started discussing the possibilities of the RQFII scheme with Ashmore in 2013. As an investment house with a primary focus on fixed income, the relaxation of the RQFII rules on relative equity/bond investment were especially pertinent. An additional factor was that in July 2013 China announced the intended
expansion of the RQFII scheme to London. However, these and other RQFII opportunities would also be beneficial for numerous other managers, so the challenge for Ashmore was how quickly its application could be successfully submitted. This became
even more important when the actual inception of the RQFII scheme for London was announced sooner than originally anticipated.
The Solution Fortunately there were a number of factors favouring Ashmore. Firstly, after extensive discussion of the RQFII scheme with HSBC, the firm had already made a definite decision to apply, while some other investment managers were still considering whether to do so. Secondly, due to its existing QFII status and office presence on the mainland, Ashmore had a good understanding of the application process and its requirements. Thirdly, Ashmore’s application would be supported by HSBC’s extensive team in China with its expertise relating to regulatory matters, plus Ashmore would be able to rely upon the immediate availability of HSBC’s solutions in areas such as onshore custody.
The Result The application was submitted with the assistance of HSBC within two weeks of the go live of the London RQFII scheme in December 2013. The first stage of the application process is for RQFII status and the licence for this was granted by the China Securities Regulatory Commission(CSRC) four weeks later.
The second stage of the process is to apply for and obtain an RQFII investment quota from China’s State Administration for Foreign Exchange (SAFE). This was approved and allocated by SAFE in early March 2014, but with a significant (and beneficial) change from former practice. Previously SAFE quota allocations were made on the basis of a maximum of one allocation, per investment manager, per fund, per month. On the advice of HSBC, Ashmore submitted prioritised allocation applications for three funds at the same time. Unexpectedly, SAFE then allotted allocations for all three funds simultaneously for a total of RMB3bn, which was also the largest quota allocation for the month. The third and final stage of the RQFII application process is for the People’s Bank of China (PBOC) to approve Ashmore’s access to the China Inter-bank Bond Market (CIBM). At the time of writing3 this is still underway, but Ashmore is expected to begin live trading in July 2014.
Conclusion The rapid and successful submission of Ashmore’s RQFII application making it the first investment manager outside Greater China to 3 June 2014
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be awarded an RQFII licence - has given it an important edge over other offshore managers. The fact that Ashmore was familiar with the process, was able to move fast and was working in conjunction with HSBC all helped to ensure a rapid turnaround. As anticipated, the popularity of the RQFII scheme and its availability now in China, Hong Kong, Singapore, London and Paris has resulted in an extremely high number of applications by other managers. This means that it now typically takes the first stage of applications under the London RQFII scheme several months to process, in comparison with the one month achieved by Ashmore and HSBC. Ashmore therefore has the competitive advantage over its peers of a head start in the market.
Commodity Trading: RMB letter of credit discounting
London plays a major role as a global hub for international commodity trading. Since Bank of China Limited set up its Commodity Business Centre in Bank of China Limited London Branch in December 2014, many big players in the commodity trading business in London have established a relationship with Bank of China Limited London Branch. As China has become one of the world’s biggest buyers and endconsumers of commodities, it provides great RMB business opportunities to UK commodity trading companies.
An important currency Despite the competitiveness from other countries, the UK remains an important international Financial Centre, with major derivatives exchanges located in London accounting for around 15% of global commodity trade. London as one of the leading international financial centres benefits from a strategic location as it hosts many international firms, investment banks, and other financial institutions that trade on commodity derivatives. Major commodity derivative exchanges located in London include
NYSE Liffe (Europe’s biggest exchange for ‘soft commodities’), London Metal Exchange (the leading global exchange for non-ferrous metals), and ICE Futures Europe (the biggest exchange for energy products in Europe). Chinese commodity companies have been very active in these exchanges and some major Chinese banks and financial institutions also became clearing members for these exchanges. In recent years, the development of commodity trading has been rapidly expanding in China, and RMB has become the second largest trade finance (L/C and documentary collection business) currency in China, occupying 8.5% share of the market, and representing 27.7% market share of cross-border payment and income currencies in China (figures are quoted as of July 2015 according to a research by Bank of China Limited). As trade finance business grows, not only Chinese commodity companies, but also some global commodity traders choose RMB as the currency for settlement. Some leading commodity trading companies in London appear to have increased volume of business with
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China and other Asian countries, e.g. Singapore, with many commodity transactions being settled in RMB. Commodity trading exporters in the UK are also willing to accept RMB Letter of Credit (L/C) and RMB discount to hedge the fluctuations of foreign exchange risk. For example, a commodity company in the UK may be the exporter under an RMB L/C issued by banks in mainland China. To facilitate its working capital and short-term financing requirement, it would apply for discounting with Bank of China Limited London Branch which can provide it with discounting in RMB or in any other major currencies. The variety of currency available opens the door for both UK and Chinese commodity companies to expand their business and seize more business opportunities in both China and the UK. Bank of China Limited London Branch also seizes this market opportunity by developing the commodity financial services with the launch of the London Commodity Business Centre, which can be construed as an indication of Bank of China Limited’s ambition and strategy in commodity markets. Bank of China Limited London Branch
provides through its Commodity Business Centre a one-stop service for international commodity trading companies in the UK and the EMEA region, helping them to explore Chinese market business opportunities.
Disclaimer This case study and any associated material (collectively, the “Material”) has been prepared by Bank of China Limited, London Branch (‘’the Bank’’). The Material has been prepared for information purposes only and no representation, warranty or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained herein. The Material should not be regarded as a recommendation to buy, sell, subscribe to or invest in any securities and financial products or investments or to obtain finance from the Bank. People reading the Material should consult their own professional advisers before making decision to obtain banking, investments or financial products from the Bank. To the extent permitted by applicable law, the Bank its subsidiaries, affiliates or group companies (collectively, “BOC Group”) disclaims liability for any error, omission or inaccuracy in the Material and shall not be responsible for any loss or damages that are incidental to or resulting from any use or reliance on the Material including any opinions expressed therein. The Material is protected by copyright. No part of it may be modified, reproduced, transmitted and distributed in any format for commercial or public use without prior written consent from the Bank.
EBS BrokerTec (ICAP plc): Development and growth of the e-traded spot CNH market
Context EBS BrokerTec’s platforms provide electronic trading solutions to more than 3,300 customers (professional trading institutions) in over 50 countries, across a range of instruments that include spot FX, non-deliverable forwards (NDFs), spot precious metals, US Treasuries, European government bonds, and EU and US repo.
Business challenges EBS BrokerTec has long recognised China’s growing importance on the world stage and facilitated the first electronic trades of CNH – offshore RMB, settled in Hong Kong – in 2010. The business had already enjoyed success in developing liquidity in the Russian ruble on the EBS Market matching platform, the largest single source of spot FX liquidity and reference price for major currency pairs, and was confident that it could bring similar efficiencies to the CNH market. Despite its early involvement in the CNH market, EBS BrokerTec faced stiff competition from other established electronic trading venues. As recently as two years ago, CNH ranked only in the top 15 of the business’s top most-traded currencies. With the rapidly increasing use of CNH as a currency of trade, however, it was essential that EBS BrokerTec take steps
to ensure it remained a part of this growth story.
The solution Following months of research and time spent with key CNH market participants in Hong Kong, EBS BrokerTec launched a new strategy for its CNH business, which included the appointment of a new global CNH specialist team – the only one of its kind focused solely on developing CNH liquidity. The team covers the Asia Pacific, EMEA and Americas regions, providing 24-hour support to its CNH trading customers. In an increasingly fragmented FX infrastructure landscape, customers have taken advantage of the multiple, complementary execution offerings provided by EBS BrokerTec. In addition to EBS Market, customers can also trade USD/CNH via EBS Direct, a relationship-based disclosed liquidity platform. The business also recently launched a new platform called EBS Select, which provides the market with non-disclosed, bilateral liquidity in a segmented pool. EBS BrokerTec has also seen increased adoption of innovative execution types, including Iceberg orders, which allow traders to minimise their market impact by displaying only a portion of their overall order. More than 40% of
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manual USD/CNH trade volume is now executed using Iceberg orders.
The result Based on customer feedback, it is estimated that in 2013, prior to the business’s strategic focus on CNH, EBS BrokerTec’s share of the electronic spot CNH market was approximately 10%. Now EBS is the primary venue for execution. As the market continues to grow, the business has seen several spot FX market trends typically observed in more established currencies being replicated in CNH. For example, algorithmic trading models require a certain level of turnover before their participation becomes viable. As these levels are reached, algorithmic trading increases, which in turn further boosts volumes. Greater participation of algorithmic traders is now evident in the CNH market. From 15th place in the rankings two years ago, the USD/CNH currency pair is now in EBS BrokerTec’s top three most-traded pairs. Over the same period, average daily trading volumes have increased by more than 1000%, and over 50% between January and June 2015. The business has also seen growth and diversification of CNH trading
counterparties on its platforms. From January 2014 to January 2015, average daily counterparties trading CNH – from 40 cities in more than 20 countries – increased by over 120%. This growth has continued into 2015, with a further 40% increase by the end of October. CNH spreads continue to tighten significantly, with spread compression on EBS Market improving over the last six months from an average of five pips in March 2015 to three pips in July 2015.
Conclusion With unprecedented stock market moves, the rapid devaluation of the yuan, and the PBOC’s announcement that more market factors will now be taken into account when determining their daily fixing rate, all eyes are focused on how the story of the liberalisation of China’s currency will unfold. The IMF’s consideration to include renminbi in the SDR basket is the latest evidence of this currency’s move onto the global stage. Alongside these developments, EBS BrokerTec remains focused on facilitating the market during this transition as the primary execution venue for CNH.
About the City of London initiative on London as a centre for renminbi business
The City of London initiative on London as a centre for renminbi business was launched on 18 April 2012. Members of the initiative are leading international banks with a strong presence in London and Hong Kong: Agricultural Bank of China (UK) Australia and New Zealand Banking Group Limited (ANZ) Bank of China (UK) Bank of Communications (UK) Barclays China Construction Bank (UK) Citi Deutsche Bank HSBC Industrial and Commercial Bank of China (UK) JP Morgan Standard Chartered With official observers from HM Treasury and the Bank of England
Alongside wider industry participants, initiative is to consider practical measures to support the development of London as a centre for RMB business. To this end, the initiative: o Provides leadership to the wider financial markets on the technical, infrastructure and regulatory issues relevant to the development of the RMB product market in London; o Advise HM Treasury on maximising London’s capacity to trade, clear and settle RMB and articulate practical next steps and long term aims for the development of the RMB market in London. o Additionally, the group advises HM Treasury and other UK authorities on any financial stability concerns the members may perceive; o Develops and maintains, as appropriate, a private sector dialogue on the international RMB market with regulators in Hong Kong and mainland China to complement that which is already maintained by the UK public sector.
For more information contact us at china@cityoflondon.gov.uk Tel +44 (0)20 7332 3659 www.cityoflondon.gov.uk/renminbi