Offshore Renminbi Forward Market
Development and Its Implication for the
Currency Internationalization Process
ARCHIVES
By
MASSACHUSETTS INSTITUTE
OF TECHNOLOLGY
Xi Wang
JUN 24 2015
B. S. Business
The Chinese University of Hong Kong, 2009
LIBRARIES
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT STUDIES
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
JUNE 2015
2015 Xi Wang. All Rights Reserved.
The author hereby grants to MIT permission to reproduce and to distribute
publicly paper and electronic copies of this thesis document in whole or in part
in any medium now known or hereafter created.
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Signature of Author:
/
IT Sloan School of Management
May 8, 2015
Signature redacted
Certified By:
Hui Chen
Associate Professor of Finance
Thesis supervisor
Accepted By:
Signature redactedMichael A. Cusumano
SMR Distinguished Professor of Management
Faculty Director, M.S. in Management Studies Program
MIT Sloan School of Management
X. Wang
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X. Wang
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Offshore Renminbi Forward Market
Development and Its Implication for the
Currency Internationalization Process
By
Xi Wang
Submitted to the MIT Sloan School of Management on May 8, 2015
in partial fulfillment of the requirements for the degree of Master of
Science in Management Studies
Abstract
China has become the second-largest economy by nominal GDP and the world's
largest economy after adjusting purchasing power by the end of 20141. Meanwhile, China is
also the largest trading nation in the world. Since the late 2000s, the People's Bank of China
(PBoC) has sought to internationalize the renminbi, the official currency of China, to improve
the international use of the renminbi and in turn to stimulate monetary efficiency. The
offshore renminbi market officially launched in Hong Kong SAR in July 2010 and the
offshore deliverable forward market was established two months later. This paper aims to
provide a detailed review of the renminbi internationalization process, particularly the foreign
exchange market, including the deliverable forward market in the offshore setting. The
review will test the correlations among the onshore deliverable forwards, the offshore
deliverable forwards, and non-deliverable forwards by conducting time-series analyses.
Moreover, interest rate parity theory is utilized to price the theoretical offshore deliverable
forwards. Substantial deviations are observed and documented between the theoretical and
actual offshore deliverable forward rates. Furthermore, regression analyses are adopted to
provide empirical evidence to explain the possible reasons affecting the prices of the offshore
renminbi deliverable forwards and the onshore deliverable forwards, also, the price
differential between these two products. Among these reasons, exchange rate expectation,
macroeconomic sentiment and market liquidity show statistically significant impact. Finally,
the paper will discuss the possible implications of the preceding analyses for the development
of the offshore deliverable forward market and the renminbi internationalization process.
Thesis supervisor: Hui Chen
Title: Associate Professor of Finance
1 Source:
IMF
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X. Wang
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TABLE OF CONTENTS
INTRODUCTION
6
CURRENCY INTERNATIONALIZATION DEFINITION
6
RENMINBI EXCHANGE RATE SYSTEM EVOLUTION
6
RENMINBI INTERNATIONALIZATION PROCESS
7
REASONS TO STIMULATE THE RENMINBI INTERNATIONALIZATION
8
RENMINBI FORWARD MARKETS
9
FORWARD PRODUCTDEFINITION
9
RENMINBI FOREIGN EXCHANGE MARKET
10
RENMINBI FORWARD MARKET
10
EMPIRICAL ANALYSES
11
DATA COLLECTION AND METHODOLOGY
11
MAJOR FINDINGS
14
IMPLICATIONS FOR THE CURRENCY INTERNATIONALIZATION
19
CONTINUOUSLY EXPANDING FORWARD PRODUCT MARKET
19
MARKET IMPACT ON THE OFFSHORERENMINBI MARKET
19
ESTABLISHED HEDGING FEATURE OF THE OFFSHORERENMINBI DELIVERABLE FORWARDS
20
CONCLUSION
21
X. Wang
6
Introduction
Currency Internationalization Definition
By definition, a currency is internationalized when market participants - residents and
non-residents alike - can conveniently use it to trade, to invest, to borrow, and to invoice in it
outside the currency's home country ("offshore") 2 . From a theoretical perspective, an
international currency should serve the money function as a unit of account, a means of
exchange, and a store of value not only within but also outside the borders of the issuing
3
country.
It took the dollar 15 years to overtake sterling in official reserves and become a
leading currency in mid-1920s after the passage of the Federal Reserve Act to promote the
US dollar's challenge to sterling in global trade and finance4 . In the late 2 0 th century, in
addition to the dominant role of US dollar, the Japanese yen, the Republic of Korea's won,
the Singapore dollar, and the euro have played some role as international currencies.
Renminbi Exchange Rate System Evolution
In the pre-reform period before 1980, the renminbi was in a fixed exchange rate
regime at an overvalued exchange rate to subsidize importers. In 1986, a dual exchange rate
system was introduced to slightly loosen the rate control. Under this dual exchange rate
system, domestic export firms had to exchange their foreign receipts into the renminbi at the
official rate, whereas foreign companies were allowed to exchange at the market rate. Since
the official rate was higher than the market rate in general, this policy put domestic exporters
in a disadvantage situation-.
In 1994, to stabilize the economy and moderate the risks of inflation and credit boom,
a new fixed exchange-rate regime of 8.28 renminbi per dollar was in place. Along with the
growing capital inflow into China, China's central bank intervened by exchanging the
incoming dollars for renminbi at the fixed exchange rate and using the dollars to buy dollardenominated assets such as U.S. Treasuries. During this period, the major task for Chinese
officials is to control and moderate inflationary pressure. By implementing a sterilization
development policy including increased interest rates, reduced scale of commercial bank
loans, and new issuance of renminbi-denominated bonds to absorb the extra liquidity and
keep a relatively stable monetary base.
However, at the same time, the maintenance of the fixed exchange rate under this
scheme was also very costly. To intervene the fixed currency exchange rate, the central bank
had to buy US dollars using the undervalued exchange rate. Moreover, to prevent the
R. McCauley. 2011. Renminbi Internationalisation and China's Financial Development. BIS Quarterly
Review
L., and K. Tao. 2014. The Benefits and Costs of Renminbi Internationalization. ADBI Working Paper
481. Tokyo: Asian Development Bank Institute.
4 Eichengreen and Flandreau. 2010
5 L. Alfaro, and R. D. Tella. 2010. China: To Float or Not To Float. Harvard Business School
2
3 Zhang,
X. Wang
7
booming monetary policy and credit availability, China's central bank largely invested in
low-yield dollar assets such as U.S. Treasuries. Furthermore, the central bank also needed to
issue sterilization paper and require the state banks to purchase it at high prices and low
interest rates. As a result, the overall asset qualities of the state banks were questioned, and
this led to a more serious concern about China's financial stability.
Therefore, beginning in 2003, the undervalued renminbi became a popular topic and
was under significant revaluation pressure. The accumulated foreign reserve and trading
surplus especially motivated the calls for yuan flexibility from the U.S., Europe, Japan, and
Latin America.
Since 2005, a series of renminbi foreign exchange mechanism reforms has been
broadly started. China was undergoing stable growth and low inflation, which provided an
appropriate entry point for gradual currency liberalization. Several steps have been adopted
since then, including that China's capital account has been gradually opened, major state
banks have been listed, and more importantly, the renminbi has been de-pegged against the
U.S. dollar and revalued at a more flexible exchange rate.
Renminbi internationalization Process
The renminbi has made significant progress in currency liberalization and
internationalization in the past decade and more. An even more substantial move began in
July 2005 when the People's Bank of China (PBoC), the central bank of China, announced
that "China will implement a managed floating exchange rate system based on market supply
and demand and in reference to a basket of currencies, instead of pegging to the US dollar6 ".
Since then, the renminbi has started to appreciate against the U.S. dollar. By 2008, the
appreciation had reached 21% against the USD, and by the end of February 2013, the
renminbi nominal exchange rate to the USD appreciated by more than 32%, and the real
effective exchange rate (REER) of the renminbi appreciated by more than 36%7. As an
indication of exchange rate flexibility, the daily trading band in the onshore market against
the US dollar has been widened several times from 0.3% at the beginning to 2% from
March 2014.
More importantly, the establishment of an offshore market is a noticeable
development, which has substantially facilitated the international use of the renminbi. In July
2009, the restrictions on the use of the renminbi in current account transactions were
completely removed. A pilot offshore renminbi program covering trade among 358
companies from five Chinese cities and Hong Kong and Macau was also established.
Furthermore, cross-border renminbi settlement has been introduced and expanded to all
Chang Shu, Dong He, and Xiaoqiang Cheng. 2014. One Currency, Two Markets: The Renminbi's Growing
Influence in Asia-Pacific. BIS Working Papers No 446
7 Gang Yi. 2013. Exchange Rate Arrangement: Flexible and Fixed Exchange Rate Debate Revisited. People's
Bank of China.
6
X. Wang
8
foreign countries to accelerate the offshore market liquidity. Regarding capital accounts, the
funding sources have been broadened as well. The actual utilized foreign direct investment in
China has grown rapidly from USD 52.77 billion in 2002 to USD 119.56 billion in 20148,
which meant China overtaking the US and becoming the top destination for foreign direct
investment in 2014. Moreover, onshore interbank lending and bond markets have been
opened for offshore financial institutions with easier access, and the renminbi Qualified
Foreign Institutional Investor (R-QFII) scheme has allowed onshore renminbi investment
products to be offered to non-Chinese residents.
The sources and scales of offshore funds have been expanded as well. The China
Development Bank issued the first Dim Sum bond that issued outside China but denominated
in renminbi in 2007. In 2010, the regulatory requirements for both investing and issuing Dim
Sum bonds were eased. As a result, the total issuance of Dim Sum bonds reached RMB one
trillion with more than RMB 400 billion (or USD 65 billion) new issues in 20149.
Meanwhile, the PBoC started to set up bilateral currency swap facilities with overseas central
banks to secure the short-short Renminbi liquidity in offshore market. By April 2015, the
total deal amounts have reached RMB 2.67 trillion (USD 431 billion) with 29 countries 0
with 7 years' development.
On the technical
2011, Treasury Markets
renminbi exchange rate.
introduced by TMA to
cross-currency swaps.
side, a set of official rates has been established gradually. In June
Association (TMA) officially launched spot fixing for the offshore
In June 2013, the interbank interest rate fixing for the renminbi was
facilitate the offshore lending related products, such as loans and
Consequently, the renminbi offshore market scale has grown substantially. For
instance, the renminbi customer deposits in Hong Kong SAR had skyrocketed from RMB
895 million in Feb 2004 to RMB 1 trillion in Dec 2014". The progress can also be shown
from the daily average turnover growth from the renminbi spot and outright forward
transactions, where the daily average renminbi spot transaction turnover had increased from
USD 8,981 million in April 2007 to USD 33,950 million in April 2013, and that of outright
forward transaction turnover had also grew from USD 4,572 million to USD 28,104 million
during the same period'.
Reasons to Stimulate the Renminbi Internationalization
It should be said that the market condition supplied the right timing for the renminbi
to internationalize. The governmental measurements and schemes did activate and stimulate
8 Source:
Ministry of Commerce of People's Republic of China
9 Invesco PowerShares Capital Management LLC. 2015. Dim Sum Bond Primer. White Paper.
10 Source: People's Bank of China (PBoC)
" Source: Hong Kong Monetary Authority (HKMA)
12 Source: Monetary and Economic Department, Bank for International
Settlements
X. Wang
9
the internationalization process during the last decade; however, fundamental reasons behind
the rapid development are more market-driven13
Hong Kong, as the global hub for trade settlement in renminbi, has handled
impressively rising trade volume. In the first ten months of 2014, the renminbi trade
settlement grew by 70% compared to the first ten months in 2013 to total RMB 5.1 trillion1 4
and by more than ten-fold since the implementation of the renminbi trade settlement pilot
scheme in 2009. Thanks to these increasing trades between China and the rest of the Asia and
the world, there is an increasing call to use the renminbi as a settlement currency to lower the
currency risks in these transactions. At the same time, the speculation for the renminbi
appreciation attracted more exporters than importers to settle their bills in renminbi to
maintain the trade surplus. As a result, the trade situation is sustainable and beneficial for the
renminbi internationalization in a longer term.
Moreover, China has accumulated a large amount of foreign exchange reserve to keep
the undervalued renminbi exchange rate during the last decade. However, the substantial
trade surplus is largely criticized by other countries, and therefore, these countries have called
for renminbi appreciation and driven the currency liberalization process. In addition to the
substantial foreign currency reserve, the global financial instability also indirectly stimulated
the international availability of the renminbi by encouraging more central banks to sign
currency swap agreements with the PBoC to counter the potential liquidity problems under
this undesirable financial circumstances.
Last but not least, the existence of Hong Kong, as a special administrative region,
serves as an ideal first offshore centre. The arrangement to liberalize renminbi in Hong Kong
can effectively help Hong Kong to sustain its role as an international financial centre.
Meanwhile, China has started to play an essential political role while maintaining this
prosperous financial sector in Hong Kong.
Renminbi Forward Markets
Forward Product Definition
Forward product is a customized contract between two parties to buy or sell an asset
at a specified price on a future date. And renminbi forward product refers to a product that
the buyer (seller) agrees to buy (sell) a certain amount of US dollars against renminbi at a
specific value and at a specific date in the future. These contracts are customized to any
commodity, amount and delivery date, so it is more flexible to cater particular business
needs. For instance, if an American importer came into a contract to pay a Chinese exporter
in renminbi 6 months later, then the importer can enter into a forward contract and fix the 6month renminbi purchase rate today. However, since forward contracts do not trade on a
Zhang, L., and K. Tao. 2014. The Benefits and Costs of Renminbi Internationalization. ADBI Working Paper
481. Tokyo: Asian Development Bank Institute.
" Source: Hong Kong Monetary Authority (HKMA)
1
X. Wang
10
centralized exchange, they are harder for retail customers to access. Therefore, the major
customer groups for forward products are financial institutions and corporate clients. It is
largely used for hedging or speculation purposes. For hedging purpose, the involved parties
can be protected against uncertain exchange rates in the future, which may adversely affect
the profitability of the company.
Renminbi Foreign Exchange Market
The renminbi first entered the top ten most traded currency list in 2013. In April 2013,
the renminbi daily average trading turnover soared to USD 120 billion from USD 34 billion
in April 2010, which made renminbi the ninth most traded currency in terms of daily average
turnover and raised renminbi's share in global FX market to 2.2%. Among this USD 120
billion turnover, currency pair of the USD versus renminbi occupied around USD 113 billion,
94% of the total turnover. There are five main product segments under foreign exchange
market, namely, spot, outright forward, foreign exchange swaps, currency swaps and FX
options, where daily average turnover of renminbi outright forward amounted to USD 28.1
billion, capturing 23.5% of the total turnover. The renminbi outright forward was the third
most traded foreign exchange product, following USD 39.9 billion for foreign exchange
swaps, and USD 34.0 billion for spot transactions in 20131.
Although there have been gradual reforms during the last several years to open the
market, the onshore market, including onshore foreign exchange market is still under certain
restrictions. Only domestic banks and domestic subsidiaries of foreign banks can access the
local wholesale market'6 . Moreover, the daily spot fixing rate is set by the central bank with a
daily trading band of 2%. As a result, the foreign exchange transaction in onshore market is
still under a certain level of limitations. In contrast, the renniinbi in offshore markets is freely
traded. Any institution can access the renminbi offshore market with no restrictions on
transaction amount or trading purpose, which means any entity can enter into the renminbi
contracts for either hedging or speculation purpose. The exchange rates are completely
determined by the market supplies and demands.
Renminbi Forward Market
An onshore renminbi deliverable forward (DF) market has been introduced since
October 2005, shortly after the announcement of the renminbi managed float exchange rate
regime in July 2005, to serve the domestic hedging and speculation demands. However, the
Chinese authority has not officially allowed non-residents or foreign participants to access to
the onshore forward market without restrictions. In April 2013, the onshore renminbi
deliverable forwards had an average daily turnover of USD 2.44 billion, which took up 18%
of the total renminbi outright forward transaction volume, and 2% of the total renminbi
foreign exchange volume in terms of daily turnover.
BIS Monetary and Economic Department. 2014. Triennial Central Bank Survey, Global Foreign Exchange
Market Turnover in 2013
16 M Funke, C Shu, X Cheng and S Eraslan. 2015. Accessing The CNH-CNY Pricing Differential: Role of
Fundamentals, Contagion and Policy
15
X. Wang
II
The renminbi non-deliverable forward (NDF) in Hong Kong has been traded since
December 199817, long before the market liberalization, allowing investors to circumvent the
renminbi currency risks outside the home market or speculate the currency rate movements.
In April 2013, the renminbi non-deliverable forward daily turnover amounted to USD 17.08
billion' 8 , around 61% of the total renminbi outright forward volume, and 14% of the total
renminbi foreign exchange transactions in terms of daily turnover.
According to the memorandum of co-operation on renminbi business signed on 19
July 2010, there would no longer be restrictions in establishing renminbi accounts and
providing related services in Hong Kong' 9 . Subsequently an offshore forward market, where
Hong Kong, Singapore and London act as the leading centres, has been established and
operated simultaneously with onshore market since September 2010. Unlike the onshore
market, in offshore markets the renminbi forward can be freely traded by any market
participants and the renminbi can be physically delivered at the settlement day. Sometimes,
people refer the offshore market as CNH market. The CNH market initially represented the
renminbi transactions taking place in Hong Kong SAR, but later on, CNH market has become
a reference term representing renminbi offshore markets, including Hong Kong and all other
markets geographically outside mainland China. It is worth mentioning that the offshore
renminbi (CNH) deliverable forward market has become more actively transacted gradually.
In April 2013, the daily turnover of the offshore renminbi deliverable forwards amounted to
USD 7.10 billion, almost triple the size of that in the onshore market.
A three-way split of the renminbi forward market currently exists. They are onshore
deliverable forward (CNY DF), offshore deliverable forward (CNH DF), and non-deliverable
forward (NDF). The main difference between deliverable forward and non-deliverable
forward is whether the contract principals have been delivered or not at the delivery date in
the future. Under a deliverable forward contract, the buyer actually exchanges the designated
US dollars to purchase the renminbi and takes the delivery of the renminbi. Under a nondeliverable forward contract, at the contract expiration date, the buyer receives (or pays) the
gain (or loss) in US dollars that measures the difference between the contract price and the
benchmark price. No physical delivery of the renminbi happens in the process of the nondeliverable forward settlement.
Empirical Analyses
Data Collection and Methodology
The development of the offshore renminbi deliverable forward products within the
last 4.5 years has been tremendous. The daily transaction volume had reached USD 7.1
billion by April 2013 and it continues growing. This section aims to test the potential
7
Y. D. Wang. 2010. Anomaly in China's Dollar-RMB Forward Market.
1 R McCauley, C Shu, and G Ma. 2014. Non-deliverable Forwards - 2013 and Beyond. BIS Quarterly Review.
19 Source: Hong Kong Monetary Authority (HKMA)
X. Wang
12
correlations among the offshore renminbi deliverable forward prices, onshore renminbi
deliverable forward prices, and non-deliverable forward prices, the gap between the
theoretical offshore deliverable forward prices using interest rate parity and the actual trading
forward prices, and the possible causes that drive the offshore renminbi deliverable forward
price movements, the onshore renminbi deliverable forward price movements, and their price
differential.
Interest rate parity represents a zero-arbitrage condition where it should be indifferent
to invest in different interest rate markets in two countries. According to the covered interest
rate parity formula, forward contracts are theoretically priced based on the interest rates of
the two underlying currencies and the exchange rate. If market anticipates a major currency
revaluation, such as the renminbi appreciation, forward contract prices should react in a
positively correlated direction accordingly. In addition, interest rate changes should also
influence the forward rate, where in the USD versus renminbi currency pair with USD as a
base currency, the USD interest rate should have a negative correlation whereas the renminbi
interest rate should have a positive correlation with the forward rate.
Moreover, with the consideration of the over-the-counter transaction feature of
forward products, counterparty risks and transaction costs should also affect the prices. In
addition, since underlying currencies of the offshore deliverable forwards and nondeliverable forwards are in general under convertibility controls or capital flow restriction in
their respective onshore market, where offshore investors have limited access to it, therefore,
regulatory changes that potentially affects trading flexibility and market liquidity in the
offshore renminbi market, particularly in Hong Kong SAR market, have been taken into
considerations to assess their market impact on price fluctuation as well. Since the renminbi
market has been undergoing the process of relaxation of capital control policies, the policies
that regulate the segmentation of the two markets, as well as the flows between these two
markets, can be potentially critical to the new renminbi market liquidity and capital flows,
which will in turn has also anticipated impacts on forward product prices. Therefore, daily
bid and offer spreads of the 12-month offshore deliverable forward points were collected to
measure the market liquidity status. A tighter bid-offer spread indicates a more liquid market
condition.
In general, the renminbi financial product prices including forward product prices are
influenced by fundamental macroeconomic conditions in mainland China as well as global
market. To capture the macroeconomic status in mainland China, two indirect representatives
derived from Shanghai/Shenzhen stock indices and Hang Seng China enterprises index are
adopted. Besides the domestic market, global risk appetite as well as the risk assessment
towards China, can also influence the prices of the offshore renminbi forward market. VIX,
the Chicago Board Options Exchange Market Volatility Index, is referenced as a measure to
future global economy volatility. The Chinese government's five-year credit default swap
price is selected to assess the investors' risk appetite towards the country and the 12-month
future volatility of onshore renminbi exchange rate is used to assess the risk sentiment
towards the Chinese currency.
13
X. Wang
The purpose of the empirical analysis is to test the correlations among the renminbi
offshore deliverable forwards, the renminbi onshore deliverable forwards and the renminbi
non-deliverable forwards. Furthermore, covered interest rate parity is adopted to calculate the
theoretical offshore deliverable forward prices. Finally, the paper aims to establish qualitative
as well as quantitative connections to assess the potential causes affecting the renminbi
offshore deliverable forward prices, the renminbi onshore deliverable forward prices, and the
price differential between these two products. The market factors to be tested in the paper
include interest rate and exchange rate components, microeconomic factors such as credit
market indicators and volatility indices, and market liquidity indicators.
The analysis is conducted in three steps. First, correlation analyses are conducted to
expose the links among onshore deliverable forwards, offshore deliverable forwards and nondeliverable forward products. Second, covered interest rate parity formula is adopted to
calculate the theoretical offshore deliverable forward prices. Third, regression model is
adopted to exhibit possible causes that drive the renminbi offshore deliverable forward prices,
the onshore deliverable forward prices, and the price differential between these two products.
The major products tested in this paper are the 12-month renminbi non-deliverable
forward points (Bloomberg code: CCN12M), the 12-month renminbi offshore deliverable
forward points (Bloomberg code: CNHl2M), and the 12-month renminbi onshore deliverable
forward points (Bloomberg code: CCSZ1Y). Forward points are the price gap between the
forward rate of an outright forward contract and the spot rate at the time the deal is booked,
which represents the interest differential between the two underlying currencies. The data
involved are collected from September 2010 when the offshore deliverable forward products
were introduced to the market to February 2015 from Bloomberg. The correlation function
runs on both 100-day overlapping and non-overlapping window bases.
Moreover, regression analyses are conducted from September 2012 to February 2015
excluding price noises at the early stage of the market development. A series of financial
indicators including 1-year Shanghai interbank borrowing rates (SHIBORlY), 1-year CNH
Hong Kong Interbank Offered Rate Fixing (CNH TMA 1 Y), 1-year USD London Interbank
Offering Rates (USDLIBOR1Y), USDCNH spot rates (USDCNH), USDCNY spot rates
(USDCNY), Shanghai Shenzhen A-share stock exchange index (SHSZ300), Hang Seng
China Enterprises Index (HSCEI), 12-month future volatility of CNY exchange rate
(USDCNH1Y Vol), Chicago Board Options Exchange Market Volatility Index (VIX),
Chinese government's five-year credit default swap prices (CHINA CDS), and bid-offer
spread of the offshore deliverable forwards (Market Liquidity) are utilized to estimate the
potential influences from these variables to the offshore deliverable forward prices, the
onshore deliverable forward prices, and the price differential between these two products.
The covered interest rate parity formula takes the following form:
cn=
(1 + rcnh)
Scn * (1 + rsd)
14
X. Wang
In these equations, FCnh refers to the twelve-month renminbi offshore deliverable
forward points at day t, Senh refers to the offshore USDCNH spot rate at day t, rCnh refers to
the one-year CNH Hong Kong Interbank Offered Rate Fixing (CNH TMA 1 Y), and rsd
refers to the one-year USD London Interbank Offering Rates (USDLIBOR1 Y).
The three regression functions of this paper take the following forms:
scny g
a0 + a1 * rcny +a2 * rcnh + a3 * rusd + a4 * (cny +as *VIX +a6 * CDS +a
7
* SHSZ300 + a8 * HSCEI + ag * Spd + e
Fcnh /n
-- ao + a1 *cny + a2 *rCnf
(1)
+ a3 * rusd + a4 * cny + as *VIX + a6* CDS
(2)
+ a 7 * SHSZ300 + a8 * HSCEI + ag * Spd +
E
/
(Fnv - FCnt)
/Scny
(3)
=
ao + a1 * (+C/
*
Ceny
) +a 2 * (rcny
- rusd) + a 3 * (rcnh - rusd) + a4
+ as * VIX + a6 * CDS + a7 * SHSZ300 + a8 * HSCEI + a9 * Spd
+ E
In these equations, Fcnh refers to the 12-month renminbi offshore deliverable forward
points at day t, Fny refers to the 12-month renminbi onshore deliverable forward points at
day t, Scnh refers to the offshore USDCNH spot rate at day t, Scny refers to the onshore
USDCNY spot rate at day t, rcnh refers to the one-year CNH Hong Kong Interbank Offered
Rate Fixing (CNH TMA IY), rUSd refers to the one-year USD London Interbank Offering
Rates (USDLIBOR1 Y), and Ucny refers to the one-year USDCNY spot rate volatility. In
addition, CDS, SHSZ300, HSCEI and Spd (market liquidity) are also to explain the potential
causes influencing the respective dependent variables. a 1,a2 ,a3 ,a4 ,a5 ,a6 ,a7 ,a8 represent
quantified magnitudes of these independent variables on the estimated changes of the
respective dependent variable. ao is the observed value of respective dependent variable. e is
the error term that cannot be explained by the model.
Major Findings
1.
Although perfect positive correlations between the offshore deliverable forwards and
the onshore deliverable forwards have not been observed till now, the correlations have
generally exceeded that between the non-deliverable forwards and onshore deliverable
forwards since January 2011.
X. Wang
15
From September 2010 to February 2015, there are 1161 daily prices collected for the
12-month non-deliverable forwards, 12-month onshore renminbi deliverable forwards and
12-month offshore renminbi deliverable forwards respectively. (See Figure 1) Also, the price
differentials between the onshore deliverable forwards against either the offshore deliverable
forwards or the non-deliverable forwards are calculated. (See Figure 2), It shows that the
price differential using the 12-month renminbi offshore deliverable forward points minus the
12-month renminbi onshore deliverable forwards are generally above the x-axis especially
after the first several months of the offshore deliverable forwards launch. In contrast, the
price differential by using the 12-month renminbi non-deliverable forwards minus the 12month onshore renminbi deliverable forwards shows less pattern, where 39% of the price
differentials are above the x-axis and 61% are below the x-axis.
Moreover, correlation analyses with 100-day overlapping and non-overlapping
window are conducted to explore the links between the onshore deliverable forwards and
either the offshore deliverable forwards or the non-deliverable forwards. (See Figure 3) The
result shows that the correlations between the onshore and offshore deliverable forwards after
January 2011, four months after the introduction of the offshore renminbi deliverable
forwards, has generally exceeded the correlations between the onshore deliverable forwards
and the non-deliverable forwards except the period from October 2013 to February 2014. It
suggests that the offshore deliverable forwards may provide a more effective hedging
opportunity for offshore investors for renminbi currency risks against the onshore forward
markets with the presence of their access limitations. However, the perfect positive
correlations have not been observed between the offshore and onshore deliverable forwards
till now.
2.
The offshore deliverable forwards have been more volatile than the non-deliverable
forwards against the onshore deliverable forwards, but the volatility has been moderated
along with improved market liquidity.
The standard deviation of the correlations between the onshore and offshore
deliverable forwards is higher than that between the onshore deliverable forwards and the
non-deliverable forwards. It implies that prices of the offshore deliverable forwards are more
volatile than those of the non-deliverable forwards. However, it has shown that with
improved market liquidity, which is evidenced by the bid-offer spread of offshore renminbi
deliverable forward points, price volatility of the offshore deliverable forwards has been
effectively moderated. It is anticipated that the offshore deliverable forward prices will be
more stabilized than the non-deliverable forward prices in the near future with further
widening channels of capital flows between the onshore and offshore markets.
Based on the 1161 samples collected from September 2010 to February 2015, the bidoffer spread of 12-month offshore renminbi deliverable forward points has been substantially
tightened from 76 basis points on average in the first transaction year to 45 basis points on
average in the second transaction year, and has been further stabilized at around 28 basis
X. Wang
16
points since September 2012. (See Figure 4) Study shows that poor liquidity can directly
result in a price discount of a financial asset20 , so I measured the price movements of offshore
renminbi deliverable forward points against the policies imposed in the offshore market that
affect the market liquidity and the policies announced by the onshore market that potentially
widen the capital flows between onshore and offshore markets.
.
Hong Kong SAR acts as the gateway to the offshore renminbi market, and a
significant portion of the financial activities have been taking place in Hong Kong. As a
result, Hong Kong has played the most important role in the area of China's capital account
liberalization and market expansion especially at the early stage of the market development 1
At the same time, Hong Kong also acts as a testing ground where the mainland authorities
can effectively monitor and facilitate the process. During the process, both regulations that
are designed to limit the financial risks for the offshore use of the renminbi and policies that
control the capital flow between onshore and offshore markets have been evolved as well.
Observations show that these two categories of regulations had a substantial influence on the
overall renminbi funding pool in the offshore market, which directly affects market liquidity
and in turn affects the price volatility of the offshore renminbi deliverable forwards.
When the offshore renminbi deliverable forward market was initially established in
Hong Kong, companies who had a need to settle their imports by the renminbi in the future
were incentivized to utilize the forward products to hedge the potential appreciation of the
currency. (See Figure 5) As a result, most of the fmancial institutions were encouraged to
hold the same renminbi positions - long renminbi and short US dollar. To manage the
currency risk and limit the overwhelmingly large renminbi position, the Hong Kong
Monetary Authority (HKMA) introduced a new measure on the renminbi net open position in
December 2010. The renminbi net open position, which was defined as the difference
between on-balance sheet renminbi assets and liabilities, excluding any renminbi structural
position 2 2 , had to be restricted to 10% of respective renminbi assets or liabilities, whichever
was larger (1). This announcement immediately brought up the market awareness over the
renminbi holdings and indirectly restricted the market liquidity, since authorized institutions
could no longer expand their renminbi position without limit by executing a large amount of
transactions. The renminbi prices, including the offshore forward points, were immediately
affected: the spread between onshore and offshore renminbi forward points was broadened
from 100bps to 470bps within one month after the net open position policy was launched.
A series of policy changes to net open position have been announced since December
2010. In July 2011, HKMA allowed authorized institutions to take the net renminbi
deliverable forward position in the opposite direction to offset the net open position (2).
Moreover, in January 2012, HKMA introduced a new renminbi risk management limit,
20
Amihud, Y and H Mendelson. 1986. Asset Pricing and The Bid-Ask Spread.
R. Sean Craig, Changchun Hua, Philip Ng and Raymond Yuen. 2013. Development of the Renminbi market
in Hong Kong SAR: assessing onshore-offshore market integration.
22Hong Kong Monetary Authority (HKMA). 2010. Renminbi (RMB) Cross-Bolder
Trade Settlement and Net
Open Position.
21
X. Wang
17
requiring that any institution should maintain its renminbi cash equivalent assets at no less
than 25% of its renminbi customer deposits. Meanwhile, HKMA doubled the new open
position limit from 10% to 20% of the net assets (3). In May 2012, the 20% standard net open
position limit was replaced by a customized limit that can be set by individual institutions in
consultation with HKMA (4). In June 2012, the renminbi liquidity ratio at no less than 25%
was introduced and required by HKMA (5). Finally, in April 2013, both regulatory
requirements of net open position and liquidity ratio were removed, because "the offshore
renminbi market in Hong Kong has been growing healthily in the past two years both in
terms of liquidity and new avenues of lending and investment", stated HKMA23 . The before
and after policy announcement comparison suggests that early-stage regulatory policies
considerably influenced the offshore renminbi deliverable forward prices. (See Figure 6) In
general, soon after risk management policies were announced, it could be observed that
abnormal price movements that were measured by the spread between onshore and offshore
deliverable forwards were greatly steepened or tightened in response to the regulatory
changes that affects the expected market liquidity.
On top of these risk management control policies on the renminbi positions imposed
in Hong Kong, many currency liberalization policies that aim to relax the capital flows
between onshore and offshore markets also effectively foster the pool size of the offshore
market and stimulate market liquidity. For instance, additional renminbi 310 billion quota of
RQFII, the renminbi qualified foreign institutional investor policy, that allows qualified
offshore investors to invest in onshore security markets with offshore raised funding was
announced in October 2013. This policy was anticipated to widen the funding flow channels
from offshore market to onshore market, which immediately incurred price volatility in the
offshore deliverable forward market. Furthermore, it is worthy of note that measures that
allow renminbi funds to flow across the border from onshore to offshore markets more easily
have a more substantial influence on reducing price volatility and increasing market liquidity
in the offshore market.
Therefore, although the samples showed a more volatile pattern in the offshore
deliverable market than in the non-deliverable market, it mainly happened in the initial period
after the introduction of the product. It can be explained by inadequate market liquidity when
both policy makers and market participants were inexperienced with the new product and
market. Therefore, these new policy shocks could lead to market caution over the renminbi
positions held by institutions or even financial losses sometimes in order to comply with
these new risk management limits. It was understandable that these risk management
measures at the early stage of the market development played an important role in balancing
the overall market risks and the internationalization process of the currency. However, along
with more matured regulation settings and customized risk management systems, it can be
predicted that the price volatility in the offshore deliverable market due to regulatory shocks
will be moderated, and the offshore deliverable forward prices will possibly become less
volatile compared to the non-deliverable forward prices.
23
Source: Hong Kong Monetary Authority (HKMA)
X. Wang
18
3.
Covered interest rate parity violation is observed between the theoretical and actual
offshore deliverable forward prices.
By using the covered interest rate parity formula, the theoretical offshore deliverable
prices are calculated from September 2012 to February 2015. Substantial forward point
discounts using actual forward points minus the theoretical forward points are documented.
(See Figure 7) Accordingly, with the theoretical forward points, the renminbi interest rate
discounts are also implied, where the actual renminbi interest rates are smaller than the
theoretical interest rates. (See Figure 8) It implies that theoretically with a renminbi
borrowing and a USD investing can bring arbitrage opportunity to the investors. One
explanation is that the CNH Hong Kong interbank offering rate cannot accurately reflect the
borrowing costs in the offshore market. The actual borrowing costs by investors can be much
higher than the interbank offering rates due to the limited renminbi funding pool in the
offshore market.
4.
The renminbi exchange rate expectation, China's country risk and market liquidity
mainly drives the price differential between the offshore and the onshore renminbi
deliverable forwards.
Regression formula (1) is run to test the offshore deliverable forward points that is
normalized by the offshore USDCNH spot rate against nice independent variables. The
results indicate that the offshore renminbi interest rates, USD interest rates, USDCNY
volatility, VIX, the China government's CDS, Shanghai/Shenzhen index indicator and the
offshore forward market liquidity are statistically significant to affect the offshore deliverable
forward prices. (See Table 2) Regression formula (2) is calculated to measure the onshore
deliverable forward points that is normalized by the onshore USDCNY spot rate against the
same set of independent variables. The results show a very similar pattern except that the
onshore renminbi interest rates are irrelevant to the forward price. (See Table 3) It is worth
noting that an increase in the USD interest rate drives both the offshore and the onshore
deliverable forward prices up, which disobey the interest rate parity where USD interest rates
should have a negative impact on the renminbi forward rates. This implies that currently the
interest rate parity doesn't dominate the deliverable forward pricing in both onshore and
offshore settings. The expectation of the renminbi appreciation or transaction costs can be
another critical factors to price the offshore deliverable forwards. In addition, although the
market liquidity concerns attached to regulatory risks had been largely diminished, which
was also signaled by the removal of the renminbi net open position limit and renminbi
liquidity ratio requirement, market liquidity is still playing an important role especially to the
offshore market.
Regression analysis (3) is conducted to assess the price differential between the
offshore and the onshore deliverable forwards. The results show that the onshore and the
offshore spot rate differences, the onshore USD and the onshore renminbi interest rate
differences, USDCNY spot volatility, the China government's CDS and market liquidity
X. Wang
19
have a statistically significant impact on the price differential. (See Table 4) Combining the
CNH/CNY spot rate factor, the onshore interest rate differential factor, and USDCNY
volatility component also supports that the changes in both exchange rates and exchange rate
expectations influence the forward market pricings. Moreover, China's country risk tends to
affect the price movements of the offshore renminbi deliverable forwards more significantly
than that of the onshore deliverable forwards. Lastly, improving offshore deliverable market
liquidity will tighten the price differential between the offshore and the onshore deliverable
forwards. However, the R squares of these three regressions are only between 30% and 60%,
which indicates that only a limited portion of the price differential can be explained by the
current study.
Implications for the Currency Internationalization
Continuously expanding forward product market
Market size is a critical indicator to measure the establishment and liquidity of a
market. Although the market size of offshore deliverable forward products has been growing
rapidly during the last several years, it still has large potentials for the future. For example, in
April 2013, the total volume combining Japan's imports and exports was around one-third of
that of China, but the daily turnover of the forward transactions in Japanese yen during the
same period was more than four times that of the renminbi. During the last several years, not
only was the offshore renminbi market relatively new to most corporate investors, but the
renminbi appreciation expectation also limited the transaction volumes, with most of the
investors choosing to hedge only their import positions against the renminbi receivables.
However, since the renminbi has started to have two-directional exchange rate movements, it
is expected that stronger hedging demands will come from merchants, especially exporters, in
the foreseeable future.
Market impact on the offshore renminbi market
Based on the observations above, the price movements of the offshore renminbi
forward market have become more market-driven than policy-driven after the first several
months of market development. Before that, the renminbi deliverable forward price in the
offshore market is deviated greatly from that in the onshore market because of the
insufficient market liquidity. During the same period, arbitrage opportunities did exist
through some channels. Since April 2013 when HKMA lifted a series of renminbi risk
management controls, the regulatory risks have been largely moderated. Now market
participants can set up and follow their own internal risk management policies to manage
their renminbi positions. In other words, most of the transactions will be driven by
customers' needs or market participants' views. Moreover, renminbi will be mainly used for
China-related businesses, which means ultimately a large portion of the currency needs to be
reconnected to mainland China to realize its currency value. As a result, the offshore
renminbi deliverable forward prices will gradually follow the onshore deliverable forward
X. Wang
20
prices in the short term. Eventually such arbitrage opportunities will be gradually closed
along with the growing market size and widening capital flow channels.
When the offshore renminbi market becomes fully developed, and when a larger
variety of products are freely traded and mechanisms of conducting transactions are more
established, it is to be expected that the offshore renminbi forward market will be influenced
by global macroeconomic conditions, as are other foreign exchange markets, especially those
in emerging markets. For example, the offshore renminbi markets should be affected by the
cyclical behavior of capital flows to emerging markets relative to the changes of the global
economic outlook and risk appetites. On top of domestic economic conditions, with a broader
use of the renminbi in international settings, the offshore renminbi market should be more
responsive to the external environment and global shocks.
Established hedging feature of the offshore renminbi deliverable forwards
Globally, non-deliverable forwards grew rapidly from 2008 to 2013. From April 2008
to October 2013, the average daily volume of non-deliverable forwards increased from USD
23 billion to USD 43 billion, and its percentage over all kinds of forwards rose from 11.5% to
21%2. However, this trend has become uncertain since mid-2013. On the one hand, nondeliverable forwards for speculation purposes have been undergoing stricter regulatory
controls, with regulatory institutions from both the United States and Europe calling for more
transparent reporting systems. On the other hand, non-deliverable forwards for hedging
purposes have been facing the challenges from a more freely traded deliverable forward
product.
Prior to the launch of the offshore renminbi deliverable forwards, offshore investors
could not directly hedge the currency risks outside mainland China. Non-deliverable
forwards as a substitute were widely adopted. However, the settlement of non-deliverable
forwards may incur undesirable basis risk. Non-deliverable forwards' settlements are set with
reference to the official spot-fixing rate against the US dollar at 9:30am every day by the
China Foreign Exchange Trade System. But the actual trading rate on the same day can be
within 2% bands of the fixing rate. There is a growing tendency that the actual trading
happens near the edges of the bands. Therefore, the difference between the fixing rate and the
actual trading rate leads to an unexpected volatility of the currency exchange rate, which is
referred to as basis risk. For a company that prefers a direct hedging of its renminbi open
position, non-deliverable forwards sometimes can cause unfavorable exchange losses.
Moreover, since the investors cannot physically obtain the renminbi currency at the
settlement day - they only receive (or pay) the gain (or loss) in US dollars that measures the
difference between the contract price and the benchmark price - it is ineffective for the actual
renminbi users to settle payments in renminbi.
24
Source: London Foreign Exchange Joint Standing Committee
X. Wang
21
In contrast, the offshore deliverable forwards provide a more flexible and costeffective alternative. No matter whether it is for hedging or speculation purposes, the physical
delivery of the renminbi currency offers a higher flexibility so that investors can decide if
they would like to exchange the renminbi currency back to USD on the same day or any day
in the future, or they can use the renminbi directly for payments. In addition, because the
fixing rate is set by reference as the current trading rate, the basis risk during deliverable
forward settlements is very minimal. Therefore, in general, with a more liberalized offshore
market where the renminbi deliverable forwards are widely available, the transaction volume
of the renminbi non-deliverable forwards is expected to gradually decrease and more
investors who are seeking hedging solutions will choose deliverable forwards instead of nondeliverable forwards to mitigate the potential basis risks.
Currently, the Chinese government still restricts non-residents from accessing onshore
market, including onshore forward market. Simultaneously a pool of renminbi circulates in
the offshore market with widening capital flow channels. During the last several years, the
accumulated transaction volume of the offshore deliverable forwards has already started to
challenge the volume of non-deliverable forwards. Therefore, because of the flexibility and
affordability, the offshore deliverable forwards may become the major hedging product for
renminbi currency risks in the near future.
Conclusion
The offshore renminbi deliverable forward market has been growing substantially
since September 2010. This study has collected more than 1100 samples from September
2010 to February 2015 to explore the correlations among the offshore deliverable forwards,
the onshore deliverable forwards, and the non-deliverable forwards, and the possible causes
driving the price differentials during the period. In the early period of the market
development, the market liquidity was inadequate. Therefore, policies that regulate the
renminbi positions in the offshore market significantly influence the market sentiment and in
turn influence the product prices. The observations show that new policy announcements
largely incurred recognizable price volatility. However, the policy-driven price movements
have been moderated with a more sizable transaction volume and a more established market
environment.
The market liquidity has been largely improved along with the market development.
This is evidenced by the bid-offer spread of offshore renminbi deliverable forward points.
Consequently, the price changes of the offshore deliverable forwards have also become more
market-driven. According to the correlation analyses, there has been established correlation
between the onshore and offshore deliverable forward markets. However, the violations of
covered interest rate parity still shows that inadequate funding pool, or potentially higher
transaction costs affects the current market. Moreover, the interest rate factors and global
volatility expectation also have a statistically significant impact on the offshore deliverable
X. Wang
22
forward price. It not only exhibits a more integrated connection between these two markets,
but also demonstrates an increasing impact from a global macroeconomic perspective.
During the past four and a half years, the progress of the offshore deliverable forward
market has revealed a successful angle of the renminbi internationalization process. In the
future, the goal to liberalize the renminbi will further foster the market size of the offshore
deliverable forwards. In addition, the forward market volatility will be influenced by both
domestic economic status and global risk appetite since market liquidity and regulatory
concerns will be largely eliminated. Lastly, given its flexibility and effectiveness, the
offshore deliverable forward product is estimated to challenge the utilization of nondeliverable forwards and become the major hedging product of the renminbi exchange rates
in the offshore markets.
23
X. Wang
Table 1
Correlations with 100 days non-overlapping window among the 12-month renminbi nondeliverable forwards, the 12-month onshore renminbi deliverable forwards, the 12-month
offshore renminbi deliverable forwards from September 2010 to February 2015
Aug-12
Dec-12
May-13
Oct-13
Feb-14
Jul-14
Nov-14
0.62
0.76
0.61
0.87
0.26
0.40
0.53
0.75
0.29
0.34
0.70
0.46
0.70
0.77
0.66
0.35
0.82
0.81
0.67
0.71
0.78
0.84
0.55
0.83
0.93
0.93]
Sep-10
Jan-11
Jun-11
Nov-l1
CNH DF vs NDF
0.09
0.74
0.76
0.59
CNY DF vs NDF
0.73
0.14
0.75
CNH DF vs CNY DF
-0.21
0.38
0.72
Correclations
Correclations
Average
SD
CNH DF vs NDF
0.58
0.23
CNY DF vs NDF
0.56
0.23
CNH DF vs CNY DF
0.66
0.32
Mar-12
X. Wang
24
Table 2
Regression results of the 12-month renminbi offshore renminbi deliverable forwards from
September 2012 to February 2015
Offshore DF Points Regression Results
(September 2012-February 2015)
Coefficients
Standard Error
t Stat
Intercept
-0.0316
0.0054
-5.8731
SHIBOR 1Y
0.0057
0.0162
0.3493
CNH TMA 1Y
0.0733
0.0275
2.6685
USDLIBOR 1Y
0.9898
0.1269
7.7996
USDCNY1Y ATM VOL
0.0026
0.0007
3.9096
VIX
0.000364
0.000082
4.422836
5Y CDS
0.000034
0.000017
1.982229
SHSZ300 Index
0.000007
0.000001
5.403002
HSCEI Index
0.000001
0.000001
1.375315
Market Liquidity
0.000078
0.000020
3.958086
Observations
R Square
645
0.5621
X. Wang
25
Table 3
Regression results of the 12-month renminbi onshore renminbi deliverable forwards from
September 2012 to February 2015
Onshore DF Points Regression Results
(September 2012-February 2015)
Coefficients
Standard Error
t Stat
Intercept
-0.0270
0.0063
-4.2731
SHIBOR 1Y
-0.0050
0.0191
-0.2634
CNH TMA 1Y
0.0488
0.0322
1.5149
USDLIBOR 1Y
1.2591
0.1489
8.4541
USDCNY1Y ATM VOL
0.0027
0.0008
3.4063
VIX
0.0004
0.0001
3.6884
5Y CDS
-0.000019
0.000020
-0.948252
SHSZ300 Index
0.000008
0.000001
5.536295
HSCEI Index
0.000000
0.000001
0.406342
Market Liquidity
0.000049
0.000023
2.128981
Observations
R Square
645
0.4851
X. Wang
26
Table 4
Regression results of price differentials between 12-month renminbi onshore renminbi
deliverable forwards and 12-month renminbi offshore deliverable forwards from September
2012 to February 2015
Offshore/Onshore DF Differential Regression Results
(September 2012-February 2015)
Coefficients
Standard Error
t Stat
Intercept
0.5576
0.0406
13.7397
CNH/CNY Spot
-0.5601
0.0402
-13.9183
SHIBOR-USDLIBOR 1Y
0.0255
0.0058
4.3701
TMA-USDLIBOR 1Y
0.0031
0.0097
0.3225
USDCNY1Y ATM VOL
0.0005
0.0003
1.9880
VIX
-0.000037
0.000031
-1.2093
5Y CDS
0.000041
0.000007
6.2836
SHSZ300 Index
0.000000
0.000000
0.9954
HSCEI Index
-0.000000
0.000000
-1.2121
Market Liquidity
0.000030
0.000007
4.1327
Observations
R Square
645
0.3685
27
X. Wang
Figure 1
Price movements of the 12-month onshore renminbi deliverable forwards, the 12-month
offshore renminbi deliverable forwards, and the 12-month non-deliverable from September
2010 to February 2015
3000
2000
1000
0
-1000
-2000
3000
1/9/10
1/3/11
1/9/11
1/3/12
---- CNHDF
1/9/12
-CNYDF
1/9/13
1/3/13
--
1/3/14
1/9/14
NDF
Figure 2
Price differentials among the 12-month onshore renminbi deliverable forwards, the 12-month
offshore renminbi deliverable forwards, and the 12-month non-deliverable from September
2010 to February 2015
1,600
1
1,200
800
400
0
-400
-800
-1.200
-
Offshore-onshore DF price differential
-NDF-onshore
DF price differential
X. Wang
28
Figure 3
Correlations with 100 days overlapping/non-overlapping window between the 12-month
renminbi deliverable forwards and the 12-month onshore/offshore renminbi deliverable
forwards from Sep 2010 to Feb 2015
1.00
0.80
0.60
0.40
0.20
-0.20
-0.40
-0.60
-0.80
1/9/10
1/3/11
-
1/9/11
1/3/12
CNH DF vs CNY DF
-
1/9/12
1/3/13
CNH DF vs NDF
-
1/9/13
1/3/14
1/9/14
CNY DF vs NDF
1.00
0.80
0.60
0.40
0.20
-0.20
-0.40
Sep-10 Jan-11 Jun-11 Nov-11 Mar-12 Aug-12 Dec-12 May-13 Oct-13 Feb-14 Jul-14 Nov-14
CNH DF vs CNY DF
---
CNH DF vs NDF
-
CNY DF vs NDF
29
X. Wang
Figure 4
The 12-month offshore renminbi deliverable forward bid-offer spread from September 2010
to February 2015
300
250
200
150
100
50
V I
0
1/9/10
1/9/11
1/9/12
1/9/13
1/9/14
bid-offer spread in absolute basis points
Figure 5
Cross-border renminbi trade settlement with Hong Kong SAR from 2009 to 2012
RMB bn
400
350
300
250
200
150
100
50
0
* Payments from HK to mainland
E Payments
from mainland to HK
30
X. Wang
Figure 6
12-month Renminbi onshore and offshore deliverable forward spread (September 2010 to
August 2012) with regulatory influence
Onshore and Offshore Deliverable Forward Spread (Sep 2010- Aug 2012)
bps
1000
s00
-1000
0
00
0
-4-4"
Figure 7
Forward point discounts between the theoretical and actual offshore deliverable forward
prices (September 2012 to February 2015)
20%
10%
0%
-_
~
-~
- - - --
- - - -- -_--^ - ~
-10%
-20%
-30%
-40%
-50%
-60%
-70%-80%
Date
10/5/13
4/1/13
---
13/9/13
17/1/14
23/5/14
% of (Actual FD points-Theoretical FD points) over Theoretical FD points
26/9/14
30/1/15
31
X. Wang
Figure 8
Interest rate discounts between the theoretical and actual offshore renminbi interest rates
(September 2012 to February 2015)
0.50
-0.50
-1.00
-1.50
-2.00
Date
4/1/13
10/5/13
-Theoretical
13/9/13
17/1/14
23/5/14
interest rate -actual interest rate
26/9/14
30/1/15