Hong Kong
The People’s Bank of China amended the calculation of the reserve requirement ratio (RRR) for banks on June 3, with the new assessment considering the daily average deposit level rather end of period amounts to determine the RRR ratio. Analysts agreed the change would have a positive impact on offshore RMB (CNH) liquidity and avoid a repeat of March 31, when banks rushing to reduce their holdings of offshore RMB deposits at quarter end pushed interbank lending rates into negative territory for the first time.
“The change of assessment of denominator to daily average from end of period is unlikely to have significant impact on onshore liquidity,” wrote Tommy Xie economist, OCBC. “However, it may help smooth quarter end liquidity in the offshore RMB market. [The March 31] distortion is unlikely to happen again at quarter-end as banks have less incentive to reduce quarter-end deposit base after the change of assessment to daily average. As such, we expect a more stable offshore RMB liquidity.”
The Hong Kong Exchange said the average daily volume (ADV) of trading for its USDCNH contracts was 1,118 in May 2016, down 12% from a month earlier, according to a report published on May 31. The HKEX also launched trading of four new CNH futures on May 31. Of the four contracts, respectively EURCNH, JPYCNH, AUDCNH and CNHUSD, only the last one saw any action, with ADV of 38 contacts for the first two days of trading.
In the year to date, RMB currency futures had ADV of 2,355, or 177% of the volumes in the same period of 2015.
Hong Kong also saw a rebound in RMB clearing activity, with a total of Rmb16.1tr ($2.47tr) cleared in May, up 3.7% on a month earlier.
The CME Group, which operates a derivatives marketplace, said on June 9 that it had seen trading of foreign exchange (FX) futures contracts total $61bn in notional value in the month of May 2016. While overall ADV had dropped 4% month-on-month, the ADV for CNH contracts had actually surged by 48% in the same period.
Singapore
Ravi Menon, managing director, Monetary Authority of Singapore (MAS), told an RMB forum, held in Singapore on June 7, that the RMB internationalisation journey had slowed in light of China’s economic difficulties.
“China has embarked on the formidable task of liberalising the capital account at a time when domestic growth is slowing, its financial system is still maturing, and US monetary policy is normalising,” he said. “The process has therefore entailed careful calibration and periodic reassessment – crossing the river by feeling the stones.”
He noted that RMB internationalisation would moderate in the near term due three factors. The first was the slowing growth of merchandise trade, with less room for explosive RMB adoption, the second was due to end of the one-way bet for RMB appreciation, and third due to policy initiatives to reduce market volatility and stem capital outflows.
However, he added a number of new initiatives would boost further connectivity between China and Singapore.
“The next chapter in China-Singapore financial partnership will go beyond co-operation on RMB business and the use of Singapore as an Asian gateway. It will be a more broad-based financial partnership that will provide deeper support to China’s growing connectivity with southeast Asia. “
One area of further co-operation would be around risk management, with Chinese corporates operating across Asia set to seek further foreign exchange hedging solutions via the Singapore Exchange. Another area was asset management, with financial institutions in Singapore still showing strong interest to tap the local RMB qualified foreign institutional investor (RQFII) quota.
“The RMB will become more international and Chinese corporates and financial institutions more global,” he said.
On the day of the RMB forum, Industrial and Commercial Bank of China (ICBC) Singapore branch (ICBC Singapore) launched a new shipping finance centre which would offer RMB financing. Zhang Weiwu, general manager, ICBC Singapore, noted the RMB was still making progress in global markets.
“Following the SDR [Special Drawing Rights] inclusion of the RMB in November, we have observed a marked increase for the currency and related products among financial institutions, global companies, and local enterprises for their financing needs,” said Zhang.
He added the new shipping financing centre would offer RMB products to the local maritime and shipping sector.
“This will in turn be instrumental towards establishing Singapore as a strategic focal point in China's “One Belt, One Road” and Maritime Silk Road initiatives,” he said.
Stock Connect
The SZSE launched a new trading system on June 6, which will pave the way for cross-market trading, SZSE said in a statement. According to China state media, the new system is also a further step towards readiness for the Shenzhen-Hong Kong Connect scheme. HKEX has said it has already completed technical testing for trading of Shenzhen stocks.
Meanwhile, usage of the existing link with Shanghai continues apace. The remaining net trading quota on the Southbound channel dropped a further 2.5% this week to Rmb90.2bn, while the northbound saw total net purchases of A-shares total Rmb2.7bn, with remaining quota of Rmb162.2bn.
Our stories this week:
The US-China trade relationship took a leap this week, with the US receiving the second largest ever RQFII quota from China. An agreement on RMB clearing in the States is also under way.
Debate around the possibility of A-shares inclusion in MSCI indices remains heated, with a decision coming on June 15.
Panda bonds remain attractive for sovereign issuers such as Hungary, but lack of clear tax and accounting rules weighs on other issuers, with Asian Development Bank forced to put deal on hold.
The Taiwan Futures Exchange is boosting its RMB offering with new options contracts, equity index futures.
China’s interbank trading system is partnering with a global firm for its new FX and bond trading platform.
A Bank of China RMB bond index notes price premium on CNH bonds is still quite high.