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1st ASHK Investment & Risk Management Symposium 19 April 2011 Hong Kong Market Outlook - Implications of the CNH market Woon Khien Chia Head of Local Markets Strategy, Asia The Royal Bank of Scotland woonkhien.chia@rbs.com tel. +65 6518 5169 Duncan Mansfield Solutions Structurer The Royal Bank of Scotland duncan.mansfield@rbs.com tel. +852 2966 2442 The CNH roadmap China’s market liberalisation (2002-2008) – the early days Dec 08 Feb 04 Jul 07 HK became a offshore CNY clearance centre 2003 2004 CDB issued first CNY-denominated bond outside China 2005 2006 2007 Dec 03 Jul 05 Jan 07 HK banks allowed to take CNY deposits CNY floated and revalued by 2% against USD China financial institutions allowed to issue CNY bonds in HK 1st ASHK Investment & Risk Management Symposium PBOC signed bilateral currency swap agreement with Korea (CNY180bn). First of 8 swap lines 2008 2 The CNH roadmap China’s market liberalisation (2009) – setting goal for CNY internationalisation Mar 09 Jan 09 Currency swap agreement with HK (CNY200bn) Currency swap agreements with Argentina (CNY 70bn), Belarus (CNY20bn) and Indonesia (CNY10bn) Sep 09 China issued its first CNY government bond in HK 2009 Feb 09 Jun 09 Currency swap agreement with Malaysia (CNY80bn) Trade settlement scheme expanded to allow settlement with Hong Kong and ASEAN nations 1st ASHK Investment & Risk Management Symposium 3 The CNH roadmap China’s market liberalisation (2010-2011) – the Big Bang Jan 11 Feb 10 Jul 10 HKMA allowed all forms of CNYrelated fund raising as long as funds do not flow back to mainland PBOC and HKMA signed Supplementary Memorandum of Cooperation – paved way for setup of CNH interbank market Oct 10 HKMA took over CNY clearing bank role after BOC (HK) exhausted its conversion quota PBOC launched pilot programme to allow qualified domestic firms to use CNY for outward direct investments. 2010 Jun 10 Jun 10 CNY returned to appreciation path, postLehamn crisis Trade settlement scheme expanded to allow settlement globally 2011 Aug 10 Dec 10 Foreign central banks with CNY swap lines, clearing & settlement banks for CNY trades allowed to invest excess CNY funds in onshore interbank bond market, subject to PBOC quota. Number of onshore firms eligible for CNY trade settlement was increased from 365 to 67359 1st ASHK Investment & Risk Management Symposium 4 Potential of CNY as a world reserve currency Share of world reserves – China vs. G3 60% Share of world trade – China vs. US 16% 14% 50% 12% 40% 10% 30% 8% 6% 20% 4% 10% 2% 0% 0% 48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 China US Japan Euro Area 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 China US Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 5 CNY trade settlement scheme huge boost to CNH deposit base Since initiation in Nov 09, banks have cumulatively settled CNY510bn worth of trade 600 - roughly 80% attributable to China’s imports, 20% from its exports 8 - Hong Kong and Singapore probably still key countries of import origins 500 7 CNY deposits in Hong Kong poised to reach CNY700-800bn by end-2011 6 400 5 300 4 3 200 2 100 1 0 Jul 09 0 Sep 09 Nov 09 CNY deposits in HK (% of deposits in HK, RHS) Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 CNY trade settlement (CNY bn, LHS) Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 6 New offshore CNY centres – potential competition for HK Conditions for setting up an offshore CNY centre 1. Strong trade ties with China 2. CNY swap line from PBOC 3. Central clearing directly with PBOC 4. Domestic currency traded in China’s onshore interbank market a. b. China interbank currently quotes USD/CNY, EUR/CNY, JPY/CNY, HKD/CNY, CNY/MYR, USD/SGD PBOC said more foreign currencies will be allowed to trade as CNY crosses PBOC's CNY swap lines Date of swap line agreement Size of swap line (CNY bn) % of China's total trade Korea Dec-08 180 7.0 Hong Kong Jan-09 200 7.8 Malaysia Feb-09 80 2.5 Indonesia Mar-09 100 1.4 Argentina Mar-09 70 0.5 Belarus Mar-09 20 0.07 Iceland Jun-10 3.5 0.01 Jul-10 150 1.9 Singapore Source: IMF, CEIC, RBS 1st ASHK Investment & Risk Management Symposium 7 Market anomaly 1: FX – CNH spot premium over onshore CNY spot… From peak of 2.5%, CNH spot premium over onshore CNY spot has narrowed to 0.05% 6.85 1700 1500 6.80 1300 6.75 1100 6.70 900 6.65 700 500 6.60 300 6.55 100 6.50 6.45 23 Aug 10 -100 -300 23 Sep 10 23 Oct 10 Spread (pips, RHS) 23 Nov 10 CNY spot 23 Dec 10 23 Jan 11 23 Feb 11 23 Mar 11 CNH spot Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 8 … leading to divergence in FX forward curves FX forward markets – onshore, CNH and NDF USD/CNY 1y forward – onshore vs. NDF 8.0 6.55 6.53 7.8 6.51 7.6 6.49 7.4 USD/CNY 6.47 7.2 6.45 7.0 6.43 6.41 6.8 6.39 6.6 6.37 6.4 6.35 Spot Onshore CNY 1m CNH 3m 6m Tenors Offshore NDF 12m 6.2 06 07 1y USD/CNY onshore 08 09 10 1y USD/CNY NDF 11 1y USD/CNH Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 9 Markets anomaly 2: interest rates – CNH yield curve differ in both levels and directions from onshore swap curve… CNH interest rate term structure vs. offshore ND-CCS, onshore IRS and CCS 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 Jan 10 1y CNH-CCS 2y Onshore CNY CCS 3y ND CCS Onshore IRS 4y 5y Mar 10 1y onshore CCS May 10 Jul 10 1y ND-CCS Sep 10 Nov 10 Jan 11 Mar 11 1y onshore IRS Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 10 … which led to huge premium of CNH bond issues over onshore issues, including Chinese government issues Sovereign benchmark curve set by China MOF CNH issues vs. onshore benchmark curve 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2011 2012 2013 CNH government benchmark 2014 2015 2016 2017 2018 2019 2020 2021 Onshore government benchmark Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 11 The next phase – adding asset classes, expanding geographical coverage •Mini QFII Scheme China’s domestic securities houses and fund managers to directly tap into overseas investors to invest in onshore China bonds and equities •CNY-denominated equity listing in HK Listing CNY-denominated equities offshore; investors can exchange for CNY via liquidity facility, with profits/ losses to be converted back into HKD •Inward foreign direct investment settlement Allowing foreign firms to bring offshore CNY funds into China for direct investments •More offshore CNY centres The 4 pre-requisites a. strong trade flows with China b. access to PBOC’s CNY swap line c. CNY central clearing directly with PBOC d. trading of offshore centre’s domestic currency in China interbank market 1st ASHK Investment & Risk Management Symposium 12 Implications of CNH on HKD On HKD’s dollar peg On HKD interest rates - A re-peg is not de-peg - USD rates remain anchor for HKD rates - CNH increased chances of HKD repegging to CNY… - … conditional on CNY becoming fully convertible (~ 5 years’ time) - Asset substitution – USD deposit base in HK being eroded, not HKD deposit base - Meanwhile, Hong Kong’ strong fundamentals allow dollar peg until HKD re-pegs - Re-peg pressure will come from CNH rates, not onshore CNY rates - Fortunately, CNH rates are also anchored by USD rates… - … as long as China maintain border control between CNH and onshore CNY - Bigger uncertainty is in USD rates – when will Fed starts hiking? when will it unwind QE? 1st ASHK Investment & Risk Management Symposium 13 History of HKD dollar peg USD/HKD forwards have not priced in resumption of CNY appreciation plus growth of CNH 7.95 8.4 8.2 7.90 8.0 7.85 7.8 7.6 7.80 7.4 7.75 7.2 7.0 7.70 6.8 7.65 6.6 7.60 6.4 99 00 USD/HKD spot 01 USD/HKD 1 yr 02 03 Upper CU 04 Lower CU 05 06 07 08 09 10 11 USD/CNY(RHS) Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 14 “Asset substitution” underway CNH deposits are eroding USD deposits, not HKD deposits 4.5 100 HKD trn % share 90 4.0 80 3.5 70 3.0 60 2.5 50 2.0 40 1.5 30 1.0 20 0.5 10 0.0 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 HKD USD CNY Other fcy 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 HKD USD CNY Other fcy Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 15 HKD FX forward vs. CNH forward – implying sustained HKD depreciation vs. CNY USD/HKD vs. CNH, onshore CNY, offshore CNY NDF 7.780 6.6 HKD/CNH vs. HKD/CNY, HKD/CNY NDF 0.845 7.775 6.6 7.770 0.840 7.765 0.835 6.5 7.760 7.755 0.830 6.5 7.750 7.745 6.4 0.825 7.740 6.4 7.735 O/N CNH 1W 2W 1M CNY onshore 2M 3M 6M CNY NDF 9M 1Y HKD (RHS) 0.820 O/N HKDCNH 1W 2W HKDCNY 1M 2M 3M 6M 9M 1Y HKDCNY NDF Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 16 HKD interest rates vs. CNH rates – anomaly between interbank deposit rates and implied swap offer rates Interbank rates – hibor vs. CN-hibor, Libor Rates implied from FX forward curves 1.4 1.0 0.5 1.2 0.0 1.0 -0.5 0.8 -1.0 0.6 -1.5 -2.0 0.4 -2.5 0.2 -3.0 0.0 O/N CNH 1W 2W USD 1M HKD 2M 3M 6M 9M 1Y -3.5 O/N CNH 1M 2M CNY onshore 3M 6M CNY NDF 9M HKD 1Y USD Libor Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 17 HKD rates – front-end lower, curve to steepen vs USD EFN vs. IRS EFN vs. UST 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 02 03 EFN 2y 04 05 IRS 2y 06 07 EFN 10y 08 09 IRS 10y 10 11 02 03 EFN 2y 04 05 UST 2y 06 07 08 EFN 10y 09 10 11 UST 10y Source: Bloomberg, RBS 1st ASHK Investment & Risk Management Symposium 18 The CNH Market • • • • Types of CNH products CNY, CNH and CNY NDF compared CNH market liquidity Examples of CNH FX investment products 1st ASHK Investment & Risk Management Symposium 19 Overview • CNH market – developing and does not offer the liquidity many need to hedge their risks • Onshore CNY – generally not open to Hong Kong investors and involves CNY/CNH basis risk • CNY NDF/NDS – better liquidity than CNH but also involves basis risk • Some structured investment products are available for participants to reduce or increase exposure to CNH/HKD and/or provide better yields than CNH money markets 1st ASHK Investment & Risk Management Symposium 20 Snapshot of CNH-denominated product availability CNH product Availability Remarks Spot Yes USD 500mn interbank volumes Forward Yes There are now CNY DF, CNY NDF and CNH DF curves CCS Yes Illiquid Money market Yes Interbank trading relatively thin amid CNH ‘pooling’ in small number of institutions CDs/structured notes Yes for CDs CDs launched; structured notes and deposits in early development stage FX options Yes Illiquid Structured products Not all Fully funded structures so far Bonds Yes Hong Kong CNH bond market continues to build 1st ASHK Investment & Risk Management Symposium 21 CNH vs. onshore CNY and offshore CNY NDF CNY CNH CNY NDF China onshore Abroad, (Hong Kong for clearing) Abroad Who is allowed to buy/sell Only companies in China (with supporting documents) Everyone outside China Everyone outside China Freely convertible No Yes n.a. Products available Spot, Forwards and Options Spot, Forwards and Options Forwards and Options Remittance outside China No n.a. n.a. Remittance into China n.a. Yes, for trade purposes n.a. Delivery Delivery Cash settled in USD Current and capital account with supporting documentation Trade purposes into China alone, otherwise restrictions n.a. No fixing No fixing 2 business days ahead of maturity Trade documents, or PBOC/SAFE approvals for capital account transactions Trade documents for transfers into/out of China None Deep Spot and forward to 1y Deep Spot and forward to 3 months, modest liquidity at 1 year Location How is it settled Allowed purposes Fixing Documentation needed Liquidity NDF: Out to 1y NDS: Liquid out to 5 years, some liquidity out to 10 years 1st ASHK Investment & Risk Management Symposium 22 Market liquidity Tenor Daily Average Volume Volume per Transaction Bid to Offer - USD 10 bn USD 10-15mm 10-20 pips Liquid out to 1y -18 months USD 6 bn USD 10-15mm 50-100 pips Onshore CNY Deliverable USDCNY FX Spot USDCNY FX Forwards & Swaps Offshore CNY Non Deliverable (settled in USD) USDCNY Non Deliverable Forward (NDF) Up to 1y USD 3-4 bn USD 10-20mm 30-50 pips USDCNY Non Deliverable Cross Currency Swap (NDS or NDCCS) Liquid out to 5y USD 20-50mm USD 10-20mm 20-30 bppa - USD 400-500mm USD 5mm 10-20 pips USDCNH FX Forwards & Swaps Up to 1y USD 250mm USD 10mm 50-100 pips Fixed Income Sovereign Bonds Up to 10y Illiquid CNH 5mm 50-100bp Offshore CNH Deliverable USDCNH FX Spot 1st ASHK Investment & Risk Management Symposium 23 USD dual currency investment linked to CNH Indicative Terms & Conditions USD Principal : USD 10 million (equivalent to CNH Principal = CNH 65.2 million) USD/CNH Spot Reference : 6.5200 Tenor : 3 Months Strike : 6.5200 Redemption Conditions - if USD/CNH Spot at expiry is above Strike, Investor receives CNH Principal with 2.0% p.a. interest - If USD/CNH Spot at expiry is at or below Strike, Investor receives USD Principal with 2.0% p.a. interest Rationale and Benefits This investment is suitable for investors who are sitting on idle USD cash and do not mind converting USD into CNH. Allows the investor to take advantage of the implied (from the FX market) and real (from the depo) CNH yield difference as well as access to the CNH option market This investment offers higher returns compared to the vanilla money market rates or the sell/buy USD/CNH FX swap plus CNH deposit structure (USD 1.00% p.a.) Risks If there is depreciation on the Renminbi, the investor could be receiving less than his original invested principal in USD terms. 1st ASHK Investment & Risk Management Symposium 24 CNY Credit Linked Note Indicative Terms & Conditions CNY Principal : CNY 200 million, settled in Settlement Currency Reference Obligation : China Sovereign Tenor : 5 years Coupon : CNY 2.50% p.a. settled in Settlement Currency Redemption : 100% at maturity, or in event of default the recovery value after close-out of hedges, settled in Settlement Currency Settlement Currency References : USD or HKD (as mutually agreed on Trade Date) using onshore Spot Rationale and Benefits This investment is suitable for investors who are in need of CNY linked assets and who are comfortable with China Sovereign credit risk Different reference obligations can be used for a tailored risk/reward profile This investment offers higher returns compared to the vanilla CNH money market rates and is available to HK investors Risks Basis risk between CNH and CNY for investors hedging CNH liabilities China Sovereign in addition to the usual issuer credit risk 1st ASHK Investment & Risk Management Symposium 25 Disclaimer •This material has been prepared for information purposes only. The investments and investment services referred to herein are available only to persons to whom this material may be lawfully delivered in accordance with applicable securities laws. This material is being distributed only to, and is directed only at, persons who have professional experience in matters relating to investments, falling within Article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or to other persons to whom this material may lawfully be communicated. This material is not available to retail customers within the meaning of the rules of the Financial Services Authority (“FSA”). No securities (nor any related securities or other financial instruments or their related derivatives) (together “Securities") discussed herein may be offered or sold in the United States (“US”) except pursuant to an exception from the registration requirements of the Securities Act of 1933. The material should not be construed as an offer or solicitation to buy or sell any securities or any interest in securities. •The information contained herein is confidential and is intended for use only by the recipient (the “Recipient”). It should not be reproduced or disclosed to any other person without the consent of The Royal Bank of Scotland plc. The material remains the property of The Royal Bank of Scotland plc and/or its affiliates (“RBS”) and must be returned to RBS on request and any copies the Recipient has made must be destroyed. •The information contained herein has been prepared by RBS on the basis of information provided by the issuer or one of more of its affiliates to assist interested parties in making a preliminary analysis of this Private Placement transaction and does not purport to be all-inclusive or to contain all of the information that a prospective investor may require to make a full analysis of the transaction. •The terms of this presentation are qualified in their entirety by the Information Memorandum, which will be made available by RBS in respect of the transaction described herein, which will supersede the terms hereof. •This material is distributed on the express understanding that, whilst the information in it is believed to be reliable, it has not been independently verified by RBS. RBS makes no representation or warranty (express or implied) of any nature, nor does RBS accept any responsibility or liability of any kind, with respect to the accuracy or completeness of the information in this material. This shall not, however, restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction, which may not lawfully be disclaimed. •The Recipient of this document should make its own independent evaluation of the transaction and of the relevance and adequacy of the information in this document and should make such other investigations as it deems necessary to determine whether to participate in the transaction. •RBS, and its connected companies, employees or clients may have an interest in the Securities mentioned in this material. This may involve activities such as dealing in, holding, acting as market-makers, or performing financial or advisory services, in relation to any of the Securities referred to in this document. RBS may also have acted as a manager or co-manager of a public offering of such Securities, and may also have an investment banking relationship with any of the companies mentioned in this material. •Any views or opinions (including statements or forecasts) constitute the judgement of RBS as of the date indicated and are subject to change without notice. RBS does not undertake to update this document. The Recipient should not rely on any representation or undertaking inconsistent with the above paragraphs. •Outside the United States, this material is issued by The Royal Bank of Scotland plc which is authorised and regulated in the United Kingdom by the FSA. In the United States, this document is issued by RBS Securities Inc. a member of FINRA and an indirect wholly-owned subsidiary of The Royal Bank of Scotland plc. RBS Securities Inc. acts as agent for The Royal Bank of Scotland plc in connection with Securities activities in the United States. •The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of ABN AMRO Bank N.V. •The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. •The daisy device logo, RBS, The Royal Bank of Scotland and Make it happen are trade marks of The Royal Bank of Scotland Group plc. 1st ASHK Investment & Risk Management Symposium 26
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