The last 12 months have seen Chinese authorities step up the pace of internationalising the renminbi and ICBC has played a key role in each stage of the development, while at all times keeping a strong focus on internal risk management. This combination makes it Asia Risk’s China House of the Year.
The International Monetary Fund’s decision to add the renminbi to dollar, euro, sterling and yen in the basket of currencies used to calculate its Special Drawing Rights (SDR) reserve asset in October 2016 was of huge symbolic importance to the Chinese government, which has been lobbying for its inclusion for several years.
One month ahead of this date, the International Bank for Reconstruction and Development, an arm of the World Bank, issued a 500 million SDR-denominated bond in China’s interbank bond market. The three-year bond was settled in RMB and the multilateral agency wanted to lock in all financing costs, whilst hedging out all market and rebalancing risk between issuance and renminbi’s inclusion in the basket.
ICBC split the hedging into two parts, with the foreign exchange risk between SDR and the IBRD’s funding currency of dollars hedged on global markets via cross-currency and interest rate swaps, explains Xin Shao, Beijing-based senior manager at ICBC. Normally this would be straightforward but Shao says the process was complicated by the SDR’s unique composition.
“It was hard to decide each currency’s hedging amount at the beginning, since one month later RMB would be added to the SDR basket and each currency’s subsequent weighting be evaluated with a formula linked to its average performance from July to September. The rebalancing risk is harder to pass on to other counterparties and so we managed it internally, dynamically hedging on a daily basis until October 1.”
Hedging services were also provided to SDR bond investors meaning that ICBC risk-managed the bond’s entire exposure.
Foreign institutions have previously raised money from the onshore China market via panda bonds, which are then hedged out via renminbi derivatives on the local market but ICBC’s work on the SDR issue is the first time a Chinese bank has offered such services in foreign currencies to a multilateral agency such as the IBRD.
“The SDR hedging was a big success for us and now opens the door for Chinese commercial banks to offer such one-stop hedging solutions in foreign currencies for international financial institutions such as the IBRD,” says Shao.
The last 12 months have also seen ICBC play a significant role in expanding the provision of onshore renminbi derivatives to foreign firms. In June 2016 the People’s Bank of China announced that international investors would be allowed to hedge out their positions on the interbank bond market via derivatives.
According to PBoC rules, foreign firms can access the onshore interbank bond and forex markets through either the central bank itself or via a commercial bank that acts as an agent. The Chinese lender then assists in the completion of the trade via the CFETS (China Foreign Exchange Trade System) electronic platform. ICBC has demonstrated its leading role in this market by structuring the first cross-currency swaps, both long and short dated, for a foreign firm. Data from CFETS shows that ICBC ranked number one among its peers in the first half of 2017 for providing this type of agent services to foreign firms.
“Until now, ICBC has built co-operation relationships with over 100 foreign institutional investors from 30 countries and regions, among which there are more than 30 foreign central banks and similar institutions,” says Shao.
Critically, ICBC has upgraded its internal risk management systems to accurately price and reflect the risks it faces. The bank created bespoke modules for its in-house risk management system, which prices and risk-manages the bank’s derivatives positions.
The rationale behind creating all risk management and derivatives pricing systems in-house is simple according to Shao: it’s more efficient.
“If we can combine our department’s products – such as forex, interest rate swaps and cross-currency swaps – in one system it gives us a more efficient view of our risk when we manage positions. And because it’s created in-house it will be much easier to add new products. We also have a quant team sitting on our front desk which has developed an in-house derivatives pricing model and method.”
ICBC has also added a collateral management component to its in-house system in the last 12 months as the bank started indirectly clearing its US dollar credit default swap and interest rate swap positions on LCH. Already a member of the Shanghai Clearing House, it cleared its first trade at the UK firm in December 2016 and so far has cleared interest rate swap exposure with a total notional value of $2.5 billion.
The bank has also played a key role in developing China’s “Belt and Road” strategy, which is intended to create a twenty-first century version of the Silk Road, and has massively expanded its forex hedging capabilities, both in emerging market and G10 currencies. The bank currently offers swaps in more than 20 emerging market currencies and non-deliverable forwards in more than 60 currencies for domestic corporate clients.