New index provides insights on actual offshore RMB usage and future RMB adoption by Hong Kong corporations
Survey indicates a real need for RMB hedging products; growth of cross-border RMB transactions expected to accelerate
HONG KONG, 16 JANUARY 2013 – DBS Bank (Hong Kong) Limited today announced the launch of its first-in-town DBS RMB Index for VVinning Enterprises (“DRIVE”), offering a strategic tool for policy-makers, businesses and investors to track the actual usage and acceptance of RMB among Hong Kong companies as well as their sentiment towards future RMB adoption.
A more comprehensive and in-depth benchmark for the market
Although macroeconomic data on the circulation of offshore RMB are widely available, they are not able to offer an in-depth perspective on the developmental progress of Hong Kong as an offshore RMB centre. By focusing on the level of RMB usage and acceptance among Hong Kong-registered companies, this index aims to serve as the first benchmark to measure the pace of RMB internationalisation in Hong Kong.
Future readings allow companies to seize opportunities
DRIVE is a composite index based on questions that measure four key dimensions driving business adoption and internationalisation of RMB in Hong Kong for both local and global transactions. These four dimensions are: (1) Actual business performance in the last 12 months and expectations for the next 12 months as the underlying conditions driving corporate demand for RMB; (2) Past and future demand for RMB in business operations; (3) Usage of RMB for trade settlement; and (4) Ease of access to RMB financing.
For the fourth quarter of 2012, the index value is 54.9 and all future readings of the index will be analysed in relation to this initial reading. Subsequent index values will be released on a quarterly basis and over time will reveal a lot more about the pace of development of Hong Kong as an offshore RMB centre. Corresponding policy recommendations can be drawn from analysing the future time series. In future, the index may be extended to cover other countries which are also offshore RMB centres.
Alex Cheung, Managing Director and Head of Institutional Banking Group, DBS Bank (Hong Kong) Limited said, “As an Asian bank, DBS is committed to leveraging our Asian insights to help corporate clients capture opportunities in the region. In particular, we are able to ride on our seamless Hong Kong-China connectivity and expertise to help our clients participate in the growth of China. The launch of DRIVE is timely and we hope it will be an insightful tool to help better understand the internationalisation of RMB in Hong Kong.”
Survey indicates a real need for RMB hedging products
In the accompanying survey, nearly half of the companies interviewed said that the appreciation of RMB had a negative impact on their profit margins. This is particularly evident in companies engaged in low value-added production which mainly procure raw materials from mainland China and export finished products to overseas markets. Companies which used to rely on economies of scale and cheap labour face the risk of being squeezed out of the market. To raise their competitiveness, these enterprises should review their business models and be more cost-effective. In the course of such transformation, enterprises can make use of hedging products to reduce their exposure to exchange rate fluctuations.
Alex Cheung said, “DBS has been at the forefront of new Asian product innovation and we were among the first to offer offshore RMB products to our Hong Kong customers. The survey reveals there is a real need for RMB hedging products among local companies to reduce their foreign currency risk exposure. At DBS, we offer clients flexible offshore CNH FX structures with combinations of forwards and options and other tailor-made solutions to hedge and manage RMB exposure. CNH Cross Currency Swap is another product widely used by our clients to manage their borrowing
and debt exposures so as to minimise funding costs and achieve efficiency in asset and liability management. We will continue to offer innovative and competitive products and services and tailor-made Asian-centric solutions based on insights to meet the needs of businesses and help them seize the opportunities for sustainable growth.”
Rapid growth expected in RMB cross-border trade settlement
In the past 12 months, only 9% of companies that used trade services had settled payments in RMB; another 26% will consider to start using RMB for payment settlement in the next 12 months.
Chris Leung, Senior Economist, Group Research, DBS Bank (Hong Kong) Limited said, “The findings are consistent with the official figures released by the People’s Bank of China, which indicated that around 11% of China’s trade was settled in RMB in the first thee quarters of 2012. Compared with 80% of trade in the US invoiced in US dollars, about half of Europe’s trade settled in euro, and 30% of Japan’s trade invoiced in Japanese yen, RMB trade settlement is considered to be still in its infancy stage. There is still ample room for its growth. We expect corporate RMB usage will continue to gain traction as channels for the flowing back of RMB onshore increases.”
Opportunity to extend RMB loan business
According to the survey, a negligible number of respondents are currently using RMB loan services, which is highly attributable to policy development. There are currently not many channels for using RMB loans, other than direct investment into and trade on the mainland. There is a lack of incentive for offshore companies to obtain RMB financing.
As of November last year, outstanding RMB loans from financial institutions in Hong Kong were only RMB 70 billion, lagging behind the development of the overall offshore market. RMB deposits in Hong Kong were about RMB 570 billion, while outstanding dim sum bonds reached RMB 400 billion.
However, DBS still holds a positive view on the prospects of RMB development by banks in Hong Kong. In order to boost RMB lending business for banks in Hong Kong, the regulatory authorities began to relax RMB lending restrictions last year and introduced measures allowing the industry to fix their own RMB outstanding net open positions and modify the calculation of the ratio of current assets. Also, the Qianhai cross-border loan pilot programme is now in full swing. The size of the programme is expected to gradually expand after its launch, providing an access to RMB funds held by banks in Hong Kong.
DBS will announce the DBS RMB Index for VVinning Enterprises on a quarterly basis. Fieldwork for the inaugural wave was conducted between October to December 2012 through telephone interviews with business owners and decision makers of over 200 companies in Hong Kong.