The last decade has seen a relaxation of rules regarding RMB services. DBS Bank’s senior vice president and head of complex hybrid products, Anthony Cheng, guides us through the regulatory history of RMB business across Asia and outlines investment opportunities
Since February 2004, licensed banks in Hong Kong have been allowed to offer personal RMB services such as deposit accounts, currency exchange, remittance services and credit cards to individuals with a Hong Kong identity card. At that time, participating licensed banks were also allowed to provide a service converting RMB into HKD for designated business customers (DBCs). In December 2005, the rules were further relaxed to allow DBCs to open RMB deposit accounts. The definition of which companies qualified as DBCs was also widened to encompass a wider range of firms. Individual customers also benefited from the relaxation in rules, particularly because Hong Kong identity card holders were able to open RMB current accounts to facilitate payment of purchases made in the Guangdong province using cheques. Today, the daily conversion limit is RMB20,000 per person and the daily remittance limit is RMB80,000 per person.
Since June 2007, mainland financial institutions have been allowed to issue RMB bonds in Hong Kong, subject to the approval of the Chinese authorities. China Development Bank issued the first offshore RMB bonds in Hong Kong. Later in 2010, Hopewell Highway became the first Hong Kong corporation and McDonald’s the first foreign corporation to issue RMB bonds in Hong Kong.
Under a pilot scheme in July 2009, cross-border trades between companies in Shanghai, four cities in the Guangdong province and Hong Kong, Macau and the Association of South East Asian Nations (ASEAN) were allowed to be settled in RMB. This scheme was further expanded in June 2010 to 20 provinces and municipalities in China, covering their trade transactions with any part of the world. On December 6, 2010, the rules were relaxed once again – the list of mainland enterprises able to settle merchandise exports in RMB and eligible to participate in the cross-border RMB trade settlement scheme was significantly expanded from 365 to 67,359. Hong Kong is well-positioned to serve the greater scope of RMB trade settlement and related financial activities with an established RMB financial infrastructure and unique clearing arrangement.
According to the Clearing Agreement amendments of 2010, participating authorised institutions (AIs) can open RMB accounts for any corporate customer. There are no restrictions on RMB conversion for corporate customers, but banks can only square open positions from cross-border trades with the clearing bank. At the same time, banks can square any RMB open position with other participating AIs. There are no restrictions on RMB transfers between different customers, whether within the same AI or not. There are also no restrictions on the extension of RMB loans to corporate customers. However, RMB lending to personal and DBCs is not permitted. RMB deposits may be used as collateral for foreign currency loans. In the latest Hong Kong Monetary Authority (HKMA) circular, issued on December 23, 2010, there are certain refinements to the arrangement for conversions of RMB conducted by participating AIs with their customers for RMB cross-border trade settlement transactions. Participating AIs are also required to limit RMB net open positions – net long or net short – to 10% of RMB assets or liabilities.
Foreign central banks and participating AIs may invest in the onshore interbank bond market, subject to People’s Bank of China (PBOC) approval. This may increase the offshore RMB interbank money market liquidity and the offshore RMB funding rate, hence facilitating the development of wealth management products.
As per the PBOC circular number 249 (dated August 31, 2010), any foreign company – including those in Hong Kong, Taiwan or Macau – that is legally incorporated is eligible to apply for an open RMB non-resident account (NRA) with any bank in China, as long as the company has RMB settlement requirements. The account need not be used solely for trade-related reasons, and its opening is subject to PBOC’s case-by-case approval. DBS China is able to help foreign companies interested in opening a Chinese yuan NRA to facilitate business activities using yuan as a settlement currency.
To further enhance the circulation of RMB funds, on January 6, 2011 the PBOC announced a pilot scheme for the settlement of overseas direct investments in RMB – called the Pilot Scheme. Under the Pilot Scheme, mainland enterprises can conduct direct investments abroad using RMB, upon approval by the relevant mainland authorities. Moreover, the Hong Kong branches and correspondent banks of mainland banks can obtain RMB funds from the mainland and extend RMB lending to the enterprises conducting the investments.
RMB business in Hong Kong
From November 2010, the RMB deposit base in Hong Kong had shot up to RMB280 billion from just RMB4 billion in 2004. Banks now have to offer attractive deposit rates and investment products to attract RMB funds. DBS has sold short-term interest rate and foreign exchange-linked structured deposits to retail clients. Clients with a higher risk appetite may want to consider investing in Chinese yuan quanto equity-linked note or RMB dual currency deposits to enhance their yield. DBS is awaiting regulatory approval to participate in the onshore interbank bond market. Once approval has been received, DBS may be able to provide more attractive wealth management products and loan funding rates to clients.
RMB bonds are well received by retail and institutional customers. Since November 2010, the total notional value of RMB bonds issued in Hong Kong has exceeded RMB70 billion. DBS has comprehensive fixed-income capabilities and is able to assist its clients in raising RMB funds through the offshore RMB debt capital market.
According to the HKMA, cross-border trades settled in RMB through Hong Kong have exceeded RMB270 billion in the period from July 2009 to November 2010. Increasingly, we are seeing more companies express an interest in using the RMB as the settlement currency.
The relaxation of restrictions on RMB conversion for corporate customers has accelerated the development of the offshore RMB forex market, with daily turnover now topping about USD400 million. The spread between onshore Chinese yuan and offshore Chinese yuan is driven by two forces. On the one hand, onshore corporations are selling RMB in Hong Kong to take advantage of the discount but, on the other, offshore corporations or individuals are buying RMB to hedge or profit from the appreciation of onshore Chinese yuan. The spread has decreased substantially from 700 basis points in September 2010 to less than 100 basis points in January 2011.
On the derivatives side, the offshore market has non-deliverable forward and general-purpose RMB forward curves – banks are quoting a volatility curve. When volatility rises, this draws greater interest. There are interbank market quotes for forex swaps and cross-currency swaps for up to one year. The daily turnover is about USD300–400 million for forex swaps and nearly zero for cross-currency swaps. Since there is a spread between onshore Chinese yuan deposit rates and offshore US dollar funding rates, clients are able to take advantage of this price differential and reduce the cost of cross-border trade settlement. DBS is able to provide the relevant cross-border solutions through interest rate swaps and forward contracts.
Investing in the RMB in Singapore
In February this year, DBS launched a suite of Chinese yuan-denominated products for customers in Singapore comprising deposit accounts and currency-linked investments. Chinese yuan-denominated bonds are also available to accredited investors in Singapore. Given the high level of interest in Chinese yuan-related assets by investors keen to ride on the appreciation potential of the currency, DBS has a selection of bonds, which include Chinese government bonds and corporates. The names of these secondary bonds include China Resources Power, China Development Bank and Hopewell Highway Infrastructure.
Finally, DBS also offers a wide range of investment options, including RMB bonds and structured notes linked to various asset classes –such as forex, rates, commodity, equities, credit and unit trusts – that will give investors exposure to RMB.
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