Renminbi Developments Extract

RMB exchange rate rose below 6.5 in December and reached a 2.5 year high

• CNH appreciated below 6.5 in December and reached a 2.5 year high. The RMB exchange rate remained resilient, as the China economy recovered steadily, with the latest official manufacturing purchasing managers’ index (PMI) staying above the 50 level for 10 consecutive months.

Major off shore RMB business indicators recovered.

• RMB deposits in Hong Kong reached RMB 700 billion level, reaching 4.5 years high. According to a SWIFT report in November 2020, the RMB was the fifth most active currency for domestic and international payments by value.

Hong Kong, mainland studying framework of Southbound Bond Connect

• The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China are looking at expanding the current Bond Connect scheme. They will form a working group to study the framework for the so called southbound leg of the current Bond Connect scheme, a HKMA spokesperson confirmed on December 2nd 2020 without providing a timeline.

Six Chinese government departments reunited to optimize cross-border RMB policies

• On 4 January Six Chinese government departments jointly issued the “Notice on Further Optimising Cross-border Renminbi Policy and Supporting the Stabilisation of Foreign Trade and Foreign Investment” (Yinfa[2020] No.330). The "Notice" consists of five parts and fifteen articles, covering:
  
  • Raising the convenience of renminbi settlement for trade and investment
  • Further simplifying cross-border renminbi settlement procedures
  • Optimising cross-border renminbi investment and finance regulation
  • Raising the convenience of individual renminbi cross-border payments and receipts under the capital account
  • Raising the convenience of offshore institutions using renminbi bank settlement accounts

China’s economic performance and direction of macro-control

• Intensive investment projects might be introduced during the start of 14th Five-Year Plan period. Also, internal consumption market continuously provides momentum to the economy, boosting economic growth.

Opening up of the financial market and RMB internationalization

• The RMB was officially included in the IMF’s currency basket in 2015, and has become an international reserve currency. In 2021, central banks and foreign investors will continue their pursuit of RMB assets, which is conducive to the stability of RMB exchange rate.

The RMB exchange rate rose steadily with two-way fluctuation

• In the first phase, the RMB exchange rates came under pressure due to multiple adverse factors. In the second phase, the RMB exchange rates rebounded along with other major currencies, as China was one of the first countries to recover from the COVID-19 and the DXY index weakened.

Major offshore RMB indicators hit record highs

• According to Bloomberg, as of the end of December 2020, central bank notes continued to support offshore bond markets. Dim sum bond issuance amounted to RMB 188.85 billion (including RMB 155 billion central bank notes issued in 2020), increasing 3% compared to RMB 183.37 billion dim sum bond issuance in 2019.

RMB’s share of global foreign reserves hits historic high level

• The latest data released by the IMF (COFER) report shows that as of 3Q 2020, RMB reserves rose to USD 244.52 billion, accounting for 2.13% of the total allocated foreign exchange reserves, higher than 2.05% of previous quarter, the highest level since IMF started reporting RMB reserve assets in October 2016.

Offshore investors continue to increase holdings of RMB assets

• After more than 3 years of operation, Bond Connect marked historic highs in transactions volume, average daily transactions, as well as in the number of approved investors. In 2020, the total trading volume of Bond Connect amounted to RMB 4.81 trillion.

RMB policies are becoming more open to meet diverse needs of international investors

• In the “CCP Central Committee Recommendations on the Formulation of National Economic and Social Development Targets for the 14th Five Year Plan and the 2035 Vision”, providing important guidance for the next steps in RMB internationalization, including:
  
  • high-level external opening
  • firmly implementing external opening across a greater scope and deeper levels

The use of the RMB as an international currency will continue to increase

• Along with the increasing economic and trade cooperation between China and “Belt and Road” countries, the growth of direct investment and the “Belt and Road” projects will promote the use of RMB as a settlement, investment and reserve currency in the offshore market, also creating real demands for offshore RMB.

More dependence on domestic demand and less reliant on exports

• China's internal circulation policy is going to reduce its trade surplus. In the next few years, China will promote the formation of a new development pattern in which domestic and international circulations promote each other.

Bond Connect activities remained robust

• As of February 2021, foreign holdings in Chinese bonds reached RMB 3.5 trillion, increasing significantly by 56.6% YoY. Also, total holdings of Chinese government bonds by foreign investors stood at RMB 2.06 trillion, a historic high, surpassing RMB 2 trillion for the first time. Chinese government bonds and policy financial bonds are investors’ major focus, accounting for 43% and 37% of monthly trading volume respectively.

China Mulls Easing Capital Controls on Offshore Investments

• China is considering relaxing restrictions to allow its citizens to invest in securities outside its mainland in a bid to facilitate two-way capital flows as it opens its own capital markets to more foreign participation.
  
  • Removing the quota limit for individuals who take part in stock incentive programs of offshore-listed firms
  • Allowing domestic investors to use their $50,000 annual forex quota for purchases of securities and insurance offshore
  • Restrictions may be eased in the derivatives market, where futures trading is limited to hedging for financial institutions
  • Pledged to step up monitoring of cross-border flows and crack down on violations against its forex rules
  • Boosting the quota for its Qualified Domestic Institutional Investors program in a “timely” manner

PBOC issued RMB 25 billion central bank bills in Hong Kong

• PBOC issued RMB 25 billion central bank bills in Hong Kong on February 19. Among the total, RMB 10 billion worth of bills will mature in three months, with interest rates standing at 2.7%. RMB 15 billion worth of bills will mature in one year, with interest rates standing at 2.74%.

RMB market outlook

• We continue to hold a neutral short-term view on the RMB, where sound economic fundamentals in China is offset by PBOC’s macroprudential measures on the exchange rate and its patient monetary policy normalization stance.

FTSE Russell confirms China Government Bonds to join WGBI index in October. Bond Connect activities remained robust

• On March 29, FTSE Russell gave final approval for inclusion of China Government Bonds in its flagship bond index (WGBI) from Oct, 2021, which will be phased in over 36 months and expected given China’s 5.25% weighting. The inclusion of China Government Bonds will further encourage capital inflow to China bond market and support RMB exchange rates.

China pilots cash-pooling service integrating local, foreign currency management

• On March 12, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) announced the launch of a pilot cash-pooling service for multinational companies that integrates domestic and foreign currency management in Shenzhen and Beijing to further facilitate the use of cross-border capital.
  The cash-pooling service will include:
  
  • implement two-way macro-prudential management
  • unify domestic and foreign currency management policies
  • further facilitate the transfer and use of funds
  • allow multinationals to purchase foreign exchange at will within a certain limit
  • enhance operational and post-operational oversight

PBOC issues RMB5 billion central bank bills in Hong Kong

• On March 25, PBOC issued RMB5 billion six-month central bank bills in Hong Kong, with interest rates standing at 2.6%, 10 basis points less than last time.

RMB share of global currency reserves reached the highest since 2016

• According to the latest statistics released by the International Monetary Fund (IMF), by the end of the fourth quarter, reserves held in RMB increased to USD 267.52 billion, or 2.25% of allocated reserves, increasing 8 consecutive quarters and reached record highs.

Measures unveiled to relax Hainan market access

• China rolled out 22 measures on April 8 aimed at further relaxing market access in the Hainan Free Trade Port, to facilitate the free flow of key production factors and cultivate industries with comparative advantages internationally, according to a document jointly released by the National Development and Reform Commission and the Ministry of Commerce.

RMB internationalization and the RMB exchange rates marketization complement each other

• As RMB internationalization develops, elasticity of the RMB exchange rates have gradually increased, maintaining basic stability against a basket of currencies, showing two-way expectations and fluctuations against the USD, while the degree of marketization determined by the RMB exchange rates has further increased.