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Deutsche Bank Capital Markets & Treasury Solutions

October 2011

At the centre of RMB internationalisation

A brief guide to offshore RMB

Deutsche Bank A brief guide to offshore RMB

1. 2. 3. 4. 5. 6. 7. 8. 10. RMB becoming a global currency Why adopt the RMB? Debt capital markets Foreign exchange and rates Cross-border trade RMB road map Keeping informed Deutsche Bank in China Contacts 4 7 8 13 16 19 21 22 23

Deutsche Bank A brief guide to offshore RMB

Becoming a global currency

The internationalisation of Chinas Renminbi (RMB) is arguably the most significant financial market development since the formation of the Euro.
Why an internationalised RMB matters to you
Unrestricted offshore access to RMB trading, hedging and financing Reduced FX hedging costs for inward/ outward investment Lower transaction costs for foreign companies operating in or buying from China Ability to hedge RMB exposure as its use in international trade increases Greater investment choice and yield opportunities for CNH deposits A diversified and competitive source of financing Broader access to onshore buyers and suppliers Lays the path for gradual RMB appreciation and eventual capital convertibility

Chinas global economic relevance contrasts starkly with the underrepresentation of its currency in international trade. The worlds second largest economy and its largest exporter, China represents a significant share of global foreign direct investment. Yet its currency comprises a mere 0.3% of all global FX turnover (BIS). Chinas policy makers have made it clear they want this to change. Already, a number of measures to promote the use of RMB in cross-border trade, financing and foreign direct investment (FDI) have created a fully-functioning offshore RMB market in Hong Kong (CNH). For corporations, investors and financial institutions the opportunities are considerable. Currency risk can be neutralised by raising capital in the offshore RMB bond market to fund onshore subsidiaries. CNH bonds also offer a relatively competitive source of financing and the potential to tap a new investor base. Invoicing goods in RMB for Chinese buyers may provide competitive advantages and the potential for significant cost savings. Investors meanwhile gain unrestricted access to RMB assets through Hong Kongs CNH FX, debt and equity markets.

Key Milestones of the Development of Offshore RMB Market

Premier Wen announced the pilot scheme of RMB cross border trade settlement with HK, Macau, and ASEAN countries PBoC and HKMA sign memorandum of cooperation for RMB cross-border trade settlement pilot scheme HKMA published guideline and circular on RMB business in HK Launch of the pilot scheme in ve citiesShanghai, Guangzhou, Shenzhen, Dongguan Zhuhai with HK, Macau and ASEAN Pilot scheme extended to 20 provinces and to trading partners from all countries PBoC signed RMB 20bn bilateral cross currency swap agreement with HKMA RMB cross-border trade settlement pilot scheme extended nation-wide & Initial RMB 20bn Mini-QFII Program launched

Dec 08

Jun 09

July 09

Jun 10

Dec 10

Aug 11

Jul 09
PBoC and other ve authorities issued administrative rules for RMB settlement pilot scheme with HK, Macau and ASEAN countries

Jul 09
PBoC issued regulation for implementing the administrative rules for RMB settlement scheme

Jul 09
SAFE issued BOP reporting notices for RMB trade settlement

Aug 10
DB China acquired the quali cations to act as both domestic settlement bank and domestic agent bank

Jul 10
PBoC and HKMA signed a supplementary memorandum of cooperation of RMB cross-border trade settlement pilot scheme

Jan 11
PBoC announced the pilot scheme for Outwardbound Direct Investment (ODI) in RMB

Oct 11
MOFCOM and PBOC issue new circulars on RMB FDI

4 A brief guide to offshore RMB Deutsche Bank

How global has the RMB become?

Hong Kong now has a fully-deliverable offshore RMB market that gives foreign investors and corporations unrestricted access to Chinas currency via cash accounts, FX, bonds, equities and through cross-border trade. Foreign companies can now invest in China with RMB obtained offshore (subject to approval) while approved onshore corporations can invest overseas using RMB. Regulatory approval for remitting and repatriating CNH onshore is still required however.

CNH deposits reach a record CNH622bn

CNH deposits and cross-border trade on the rise

Three FX markets now exist for RMB Onshore CNY, which remains restricted for foreigners; offshore CNH, which is fully deliverable; and the USDdenominated non-deliverable forward market. Daily trading volumes in USDCNH now exceed USD2bn equivalent.
Forward outrights (mid-rates)

Size of HK-China cross-border settlement RMB Deposit base (rhs)

700 600 500



400 300 200


50 100 0
Ju l Au -09 g Se -09 pOc 09 t No -09 v De -09 cJa 09 n Fe -10 bM 10 ar Ap 10 r M -10 ay Ju 10 nJu 10 l Au -10 g Se -10 pOc 10 t No -10 v De -10 cJa 10 n Fe -11 bM 11 ar Ap 11 r M -11 ay Ju 11 n1 Ju 1 l-1 Au 1 g11





Source: HKMA

Hong Kongs CNH deposit base reached a staggering 622bn as of September 2011 (HKMA). Growth was initially driven by retail deposits on the expectation of RMB appreciation, however corporations, investors and banks continue to increase their share of total deposits. RMB cross-border trade spikes in 2011 RMB cross-border trade between Hong Kong and China spiked in the 12 months to August 2011, from RMB38.5bn to RMB185.8bn (HKMA), or nearly 10% of total trade. This has been largely driven by the expansion of a trade settlement pilot programme that now allows companies from all Chinese provinces and municipalities to settle trade outside of China in RMB.
China cross-border trade settlement volume (RMB bn)



6.25 Spot 2M 4M 6M 8M 10M 1Y

Source: Bloomberg, Deutsche Bank

CNH capital markets kick into gear Corporations can freely raise RMB funds via Hong Kongs CNH bond and equity markets with an established approval process for remitting proceeds onshore. The bond market has seen spectacular growth in 2011, with a broad range of issuers participating, including foreign multinational corporations. The first CNH IPO has also been successfully listed.
CNH bonds by issuer
100 90 80 70 60


50 40

Sovereign Policy Banks Commercial Banks HK Banks Foreign Banks Supranational Corporation Foreign Group


30 20


10 0 2007 2008 2009 2010 2011

Source: HKMA, Deutsche Bank

31 -J an -1 0 28 -F eb -1 0 31 -M ar -1 0 30 -A pr -1 0 31 -M ay -1 0 30 -J un -1 0 31 -J ul -1 0 31 -A ug -1 0 30 -S ep -1 0 31 -O ct -1 0 30 -N ov -1 0 31 -D ec -1 0 Q1 20 11 Q2 20 11

Source: Bloomberg, Deutsche Bank

Deutsche Bank A brief guide to offshore RMB

Whats next?
CNH assets to grow ten-fold by 2012 Deutsche Bank expects increased demand for RMB financing will see the amount of outstanding offshore RMB loans and bonds grow ten-fold to RMB700bn by the end of 2012. Going forward, the recent approval for foreign companies to remit CNH for investment onshore, rising RMB cross border trade, the competitive borrowing costs offered by CNH bonds, and a proposed scheme for foreigners to buy securities with RMB obtained offshore will be the key factors underpinning asset growth.
CNH asset growth (CNHbn)

Deposits to reach CNH2 trillion by 2012 Deutsche Bank believes growing volumes of RMB cross-border trade and the increased use of bank deposits for RMB lending and bond purchases (known as the multiplier effect) will see deposits reach CNH2 trillion by 2012.
RMB deposits in Hong Kong


RMB deposit (bn) Projected



Mar 11





-1 3

-1 4














Source: HKMA, Deutsche Bank



CNH bonds as a reliable source of financing

Bonds/loans by Chinese Bonds/loans by FDIs Bonds/loans for 3rd party use Trade credit Other (equities, MM, etc)

Source: Deutsche Bank

The CNH bond market is becoming more global, with corporations and financial institutions from 14 countries (outside of China) now issuing CNH bonds. Deutsche Bank expects CNH190bn of gross bond supply in 2011, with CNH bond market capitalization to grow to 50% of the Hong Kong debt market by 2015. As the CNH FX swap market becomes more liquid, the bond market has the potential to become a competitive source of financing for global bond issuers.
CNH bonds / HK debt
0.8 0.7 0.6 0.5 0.4 0.3 0.2

Increased RMB cross border trade RMB cross border trade between China and Hong Kong is on the rise. Deutsche Bank expects monthly volumes to reach RMB250bn by October 2011, with 30% of Chinas total trade to be transacted in RMB by 2015. The expansion of the RMB trade settlement programme in August 2011 to include all Chinese companies, adoption of the RMB by foreign corporations, growth in Chinas nominal trade volumes and an increase in Chinese outward direct investment are expected to be the key drivers of future growth.
RMB trade settlement volumes (forecast)
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2011 2012 2013 2014 2015 0.05 0 0.15 0.1 0.35

CNH bonds/HK debt other than EFN&Ef bills CNH bonds/HK debt

0.1 0 1-Dec-13 1-Mar-08 1-Mar-09 1-Mar-10 1-Mar-11 1-Dec-14 1-Jun-07 1-Jun-08 1-Jun-09 1-Jun-10 1-Sep-07 1-Sep-08 1-Sep-09 1-Sep-10 1-Jun-11 1-Sep-11 1-Dec-07 1-Dec-08 1-Dec-09 1-Dec-10 1-Dec-11 1-Dec-12 1-Dec-15

CNY bn % of RMB trade settlement

0.3 0.25 0.2

Source: Deutsche Bank

Source: Deutsche Bank

6 A brief guide to offshore RMB Deutsche Bank





Why adopt the RMB?

Doing business in RMB can have a range of benefits, including lower financing and transaction costs, reduced FX exposure, improved supplier access and greater purchasing power.
Lower borrowing costs
Borrowing costs in the CNH bond market are considerably lower than the official interest rates for onshore bank loans set by the Peoples Bank of China. The minimum interest rate on a 3-5 year onshore loan as of 7 July 2011 was 6.210%, compared to the 1.86% average coupon paid by BBB-rated and above issuers for three year CNH bonds as of October 2011.

Improve supplier access, purchasing power and domestic client base

With growing numbers of Chinese buyers and suppliers preferring to transact in local currency, foreign corporations may find that invoicing and paying in RMB can help to broaden their network of buyers and suppliers.

Minimise FX risk and lower transaction costs

For corporations that buy and sell goods in China, using RMB provides a natural FX hedge. It also helps to reduce costs associated with transacting or funding operations onshore. The CNH market also allows forward RMB exposures to be managed via FX options and forwards.

Gain exposure to potential RMB appreciation and asset diversification

Expectation for RMB appreciation has been a key driver in demand for CNH. The range of RMB assets available to corporations and investors is growing considerably, including money market products, bonds, term deposits, index products and foreign exchange. But its not just about appreciation - the growing number of international issuers in the CNH bond market also presents diversification benefits for Asias credit investors.

Deutsche Bank A brief guide to offshore RMB

Debt capital markets

After a tentative start, the CNH bond market exploded into life in 2011.

The CNH bond market grew considerably in 2011. Foreign issuers became more active, deal sizes and tenors grew, investors became more discerning, while the growing universe of outstanding bonds has made price discovery easier. In October 2011, approval was given for selected domestic Chinese companies to access the market. Importantly, new rules governing RMB foreign direct investment (FDI) provide improved clarity over the remittance process. Deutsche Bank expects FDI to ultimately contribute RMB150200bn of new bond supply each year. While many aspects of the CNH bond market mirror that of Asias offshore G3 bond market, there are important differences new issuers should consider. These primarily relate to the remittance of CNH proceeds onshore and the comparative cost of funds compared to onshore bank loans.
CNH bond issuance on the rise (RMBbn)
160 140 120 100 80 60 40 20 0 2008 2009 2010 2011 to OCT

is dependent on the size of the foreign entitys allowable debt quota (up to 6x registered capital for local holding companies). Loans can be a simpler alternative, provided there is sufficient capacity under your approved debt quota, as they can be serviced without regulatory approval after registration with SAFE. Repatriating dividends offshore to service an injection of equity capital however typically requires strict local regulatory conditions to be met. Preference will be given to entities that already trade in RMB and therefore contribute to the cross-border trade settlement scheme. Remittance for trade purposes does not require regulatory approval.

What can you expect in terms of price, size and tenor?

Deal sizes of RMB1bn are becoming common, while most tenors are at three years. Higherrated issuers can issue debt out to five or even seven years and across multiple tranches. Pricing of course varies, however the average coupon paid by BBB and above-rated issuers for three-year bonds is 1.86% (October 2011). This compares to the official 5.985% 3-year onshore loan rate set by the Peoples Bank of China (July 2011).
Onshore China v offshore USD funding rate (6m)
6m USD LIBOR oshore 6m onshore implied USD rate

Source: Deutsche Bank

Remitting proceeds what influences the approval process?

This depends largely on the type of remittance: an injection of equity capital, a CNH shareholder loan, or remittance for trade purposes. Approval for equity capital injections are typically dependent on the funds being used as new capital, rather than for refinancing. For shareholder loans, approval






-2.0% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Source: Deutsche Bank

8 A brief guide to offshore RMB Deutsche Bank

CNH deal sizes

500m - 1bn Less than 500 19 18

Who buys CNH bonds?

Investors include institutional asset managers, insurance companies, banks, hedge funds, pension funds and retail investors. First attracted to CNH assets by the prospect of RMB appreciation, investors now also value the diversification benefits of CNH bonds as the market grows to include more international credits. The number of RMB-dedicated funds in Hong Kong continues to grow, while the first investable CNH bond index (DB ORBIT) provides a passive investment option in a range of currencies for the first time.

% 20


3bn + 1bn - 3bn

Source: Bloomberg, Deutsche Bank

CNH Bonds by issuer

Sovereign Real Estate Quasi 3 7 % 38 14

Who issues CNH bonds?

The CNH bond market is truly international, with borrowers from 14 different countries (excluding China, Hong Kong and Macau) issuing bonds as of October 2011. Corporations and financial institutions are the largest issuers, accounting for around 75% of all outstanding bonds.

38 Financial Corporate

Source: Bloomberg, Deutsche Bank

CNH bonds by rating

A 9%

How well received is my bond likely to be?

Given demand for CNH assets outstrips supply and the majority of outstanding bonds in the CNH market are unrated, rated deals tend to be well-received. Pricing reflects this, with an average yield of 2.57% paid on rated issues compared to 4.05% for unrated deals (as at October 2011). Average bond yields continue to rise, reflecting the growing supply of new bonds and greater emphasis from investors on issuers credit quality.
Average yield on CNH bonds (%)

AA 1% AAA 1% BB 3% BBB 2%



Source: Bloomberg, Deutsche Bank

CNH deal tenors

10yr (1%) 7yr (3.4%) 5yr 3 13 % 17 25 1yr

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

11-May-11 23-May-11 19-Aug-11 31-Aug-11 16-Mar-11 28-Mar-11 12-Sep-11 22-Sep-11 10-Feb-11 22-Feb-11 14-Jun-11 24-Jun-11 19-Apr-11 29-Apr-11 19-Jan-11 31-Jan-11

41 3yr 2yr







Source: Bloomberg, Deutsche Bank

Source: Bloomberg, Deutsche Bank







Deutsche Bank A brief guide to offshore RMB

A brief overview of the remittance process

CNH capital injection (equity) Volume
Capital injections (including size) require the approval of MOFCOM MOFCOM SAFE PBOC Generally, there is a preference that funds which are transferred into the PRC are deployed as new capital rather than for re nancing Funds need to be invested in an industry encouraged by the government and may not be invested in real estate /stock market

CNH shareholder loan

Maximum size of shareholder advance is determined by the FIEs unused Foreign Debt Quota

Approving authorities Use of proceeds

SAFE PBOC (local / provincial and head oce levels ) Generally, there is a preference that funds which are transferred into the PRC are deployed as new capital rather than for re nancing. Funding the domestic cash pool will generally be not considered a re nancing Funds need to be invested in an industry encouraged by the government and may not be invested in real estate /stock market Issuer will not rely on dividends for debt servicing Once the shareholder loan is registered with SAFE, any debt servicing will be allowed automatically

Repayment options

Transferring money out of the PRC usually requires local regulatory approval Under CNY Pilot Scheme, entities based in 20 key designated cities can remit dividend out of China without separate approvals Withholding tax on dividend repatriation : up to 10% (ultimate tax rate depends on nationality) Withholding tax on dividend remittance to HK entity is 5%, but the Hong Kong entity has to have real business operations


Withholding tax on interest payments: up to10%

Key bene ts

Quota for FIEs to raise oshore debt (Foreign Debt Quota or Borrowing Gap) is limited; capital injection provides additional Borrowing Gap

Issuers will not rely on dividends for debt servicing Once the intercompany loan is registered with SAFE, any debt servicing will be allowed automatically

10 Action Steps to offshore RMB Deutsche Bank 2 A brief guide Week 1 Week

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

Typical timeline for a CNH bond transaction

Week 1 Action Steps Appoint professional parties Regulatory approval process Due diligence & documentation Preparation of marketing materials Issue rating process Completion of documentations Roadshow Launch & pricing

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

Weeks 1-5 Week 6

Appoint Lead Manager and other professional parties Kick-o remittance process liaise with MOFCOM, PBOC and SAFE Commence due diligence session Preparation of supplemental oering circular (SOC), principal documents (PD subscription agreement, pricing supplement, trust deed, dealer agreement), legal opinions and comfort letters Commence issue rating process and obtain issue rating Finalize all documentation Prepare roadshow presentation Obtain Chinese regulatory approval-in-principle Roadshow commences, release of pricing guidance Announcement of transaction (subject to market conditions) Pricing of transaction Closing and settlement (T+5 business days, i.e. in week 9)


Week 7

Week 8


Issuer Lead Manager Issuers Foreign Counsel Underwriters Foreign Counsel Local Counsels Auditors Rating Agency

Deutsche Bank A brief guide to offshore RMB


Support from Asias leading offshore bond house

Deutsche Bank named IFR Asias Bond House of the Year for three of the past five years* and a top-3 arranger of CNH bonds**

Why choose Deutsche Bank for your inaugural CNH bond deal?
*IFR Asia Bond House of the Year 2006, 2009 & 2010 **Top-3 arranger of CNH bonds with 9% market share (Bloomberg, October 2011) Leading market maker in CNH bonds (broker estimates) Arranger of largest-ever CNH corporate bond deal (CNH3.5 bln Sinochem Jan 2014s) Arranger of first European MNC CNH deal (CNH300m Unilever Mar 2014s) Arranger of the first three-tranche corporate CNH deal (CNH2bn Bosch und Siemens deal) #1 arranger of synthetic RMB bonds with 30% market share in 2011 (Dealogic) Launched the first investable benchmark CNH bond index (DB ORBIT)

Foreign exchange and rates

Three markets now exist for the RMB: onshore China (CNY), offshore deliverable in Hong Kong (CNH), and the USD nondeliverable forward market.

Liquidity in the CNH FX market continues to build thanks to growing levels of RMB crossborder trade and a burgeoning CNH bond market. Currency exposures can be managed via CNH FX forwards, while growing FX options and cross-currency swap markets are set to broaden the range of risk management tools available to corporations and investors. Daily spot trading volumes in USDCNH now stand at USD2 billion, up from zero in July 2010, and are expected to exceed those of the nondeliverable forward market by mid-2012. Daily spot fixing in USDCNH is provided by Hong Kongs Treasury Market Association.
CNH and CNY spot converging
spread (RHS)
6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 pips (,000) 6 5 4 3 2 1 0 -1 -2

Ultimately, the onshore CNY rate serves as a soft anchor point for USDCNH. While there are deviations from CNY, levels usually find their way back to an equilibrium as market participants move between the curve with the most favourable rates. Over the longer term, demand for CNH will be primarily supported by rising levels of RMB trade and CNH asset creation, both of which have a clear growth trajectory.
Implied appreciation NDF vs. CNH market*
1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% 1M 2M 3M 6M 9M 1Y

CNH forwards NDFs

USD/CNY spot USD/CNH spot

Source: Deutsche Bank

Source: Deutsche Bank

What influences USDCNH and why does it diverge with the onshore rate?
As a fully deliverable FX market, CNH is exposed to supply and demand dynamics. For most of 2011 strong demand for RMB exposure, driven by investor expectations for the currencys appreciation, saw USDCNH trade at a premium to the onshore CNY spot rate. As global investor risk aversion took hold in the summer however, CNH began to trade at a slight discount to CNY, following a broader sell-off in Asian currencies. This was further exacerbated by Hong Kongs clearing bank exceeding its quota for offshore CNY trades. However, the citys considerable CNH deposit base and the large cash cushion held by CNH investors have provided technical support to the market, signifying its growing maturity.

New quotas for Hong Kongs clearing bank are also expected to reduce volatility between the onshore and offshore CNY spot rates.

Deutsche Bank A brief guide to offshore RMB


Onshore investment quota for foreigners and FDI to support demand for CNH assets
A RMB20bn quota allowing foreign investors to use RMB obtained offshore for investment onshore in Chinas securities markets was introduced in October 2011, opening another important channel of demand for CNH. The quota coincides with new rules that allow foreign corporations to use RMB obtained offshore for foreign direct investment, improving transparency around the remittance process considerably a key issue for many aspiring issuers of CNH bonds. This clarity is expected to provide an important level of support for volumes in the CNH bond market and, in turn, demand for CNH. Indeed, of all Asias currencies, foreign investors are already most heavily positioned in RMB, reflecting an expectation for continued appreciation as well as growing demand for RMB assets.
Offshore FX positioning largest in RMB
DBSPI (% of AUM)
7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% IDR THB PHP INR MYR SGD TWD KRW CNY

USDCNY 12m NDF forwards vs. USDCNH 12m forwards

spread (RHS) pips (,000)

6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 Sep-10 Dec-10

USD/CNY 12m NDF USD/CNH 12m fwd

2 2 1 1 0

-1 -1 -2 Mar-11 Jun-11 Sep-11

Source: Deutsche Bank

By comparison, the USDCNY NDF market currently has USD2.5-3bn of daily volumes, although Deutsche Bank expects the CNH forward market will exceed this level by mid2012. Over time, the NDF market will likely cease to exist as market participants move to where liquidity is best. Daily volumes in the FX options market more than trebled from USD30m to USD100mn in 2011 with liquidity available in tenors from 3 months to 1 year. Growth in USDCNH options has led to the emergence of a structured FX forward market, where corporations and investors can create tailored products that best suit their individual risk management needs. An interest rate swap market has also emerged, with fixing to the 3-month Shanghai Interbank Offering Rate (SHIBOR). However, greater liquidity is currently found in the cross-currency swap (CCS) market, with tenors from 3 months out to 5 years. Liquidity in this market is expected to improve as more longdated CNH bonds are issued.

Positioning on 27 Oct 2011 Positioning on 26 Sep 2011

Source: Deutsche Bank

Risk management products in USDCNH

The CNH FX market provides a number of familiar risk management products, including FX forwards, FX options, interest rate swaps, cross currency swaps and bespoke structured risk management products. While liquidity for some products is still small, like most aspects of the CNH market, growth is on a strong trajectory. The FX forward market for example now sees daily volumes of USD1bn equivalent per day and tenors from 3 months to 1 year. It has become a useful tool for corporations and investors alike to either manage FX risk or position for possible RMB appreciation.

14 A brief guide to offshore RMB Deutsche Bank

Trade RMB with the #1 provider of liquidity to Asian FX markets*

Deutsche Bank ranked the #1 provider of liquidity to global and Asian FX markets by Euromoney for the past seven years running

Why use Deutsche Bank for your RMB FX needs?

*20.90% market share in Asian FX trading (Euromoney Global FX Survey 2011) Transacted first CNH cross-currency swap, FX swap and FX forward Leading market maker (broker estimates) First bank to launch electronic trading of CNH (via Autobahn FX) Leading provider of structured CNH FX products One of the first banks to trade FX options onshore in China

Deutsche Bank A brief guide to offshore RMB


Cross-border trade
Efforts to internationalise the RMB are founded in Chinas desire to increase global trade in its own currency.

Encouraging widespread use of the RMB in global trade settlement will ultimately determine the success of Chinas push to internationalise its currency. Signs so far are encouraging. RMB cross-border trade between Hong Kong and China has exploded in the 12 months to August 2011, from RMB38.5bn to RMB185.8bn (HKMA). Global trade in RMB is also on the rise as growing numbers of corporations open RMB accounts in order to buy and sell goods in China. With no restrictions on transferring RMB between offshore accounts, converting offshore RMB to another currency, remittance onshore for trade settlement purposes or FDI, it has never been easier for foreign corporations with links to China to adopt the RMB.
China cross-border trade settlement (RMBbn)

China is a significant market for this region, in terms of resource exports as well as components that are used in Chinese export manufacturing. Broadening their potential client base by offering goods in RMB is one key motivator for Asian exporters to China adopting the RMB.
Chinas global trade volumes (in USD)

Europe $0.57t

NA $0.42t

Americas $0.6t ME $0.12t

ME&A $0.3t

Africa $0.17t

China $2.9t

KR $0.2t

LA $0.18t

HK $0.23t

Asia $1.5t

ASEAN $0.29t



Source: CEIC 2010


31 -J an -1 0 28 -F eb -1 0 31 -M ar -1 0 30 -A pr -1 0 31 -M ay -1 0 30 -J un -1 0 31 -J ul -1 0 31 -A ug -1 0 30 -S ep -1 0 31 -O ct -1 0 30 -N ov -1 0 31 -D ec -1 0 Q1 20 11 Q2 20 11

Deutsche Bank ultimately expects 40% of Chinese trade to be priced in RMB, in-line with the volume of Japans exports denominated in Yen.
% of export invoiced in exporter home currency
100 90

Source: HKMA, Deutsche Bank

Exactly how open is the RMB to global trade?

The initial pilot trade programme launched in 2009 allowed 365 approved enterprises in five cities to settle merchandise trade with Hong Kong, Macau and ASEAN countries. This was expanded in August 2011 to cover all Chinese provinces and cities, with nearly 68,000 Chinese companies now able to settle trade as well as outward direct investment in some cases globally in RMB. This liberalisation has the potential to significantly increase volumes of global trade in RMB. This is particularly true for exporters in the Asia Pacific region, which account for 52% of Chinas global trade.

80 70 60 50 40 30 20 10 0 US UK EU JP Malaysia Korea China Thailand

Source: HKMA, Deutsche Bank

Growing range of trade products and services

The growth in cross-border trade between Hong Kong and China has led to the expansion of trade-related products and services that are commonplace in international markets.

16 A brief guide to offshore RMB Deutsche Bank

Principal among this has been the growth of RMB letters of credit, which have surged by USD12bn since July 2010 in contrast to stagnant HKD trade credit growth.
Trade credit issued by HK banks VS. value of direct RMB trade settlement
50 45 40 35 30 25 20 15 10 5 0 03 04 05 06 07 08 09 10 11

Relevance of trading in RMB for importers of Chinese goods

Companies can now purchase goods from China in RMB, provided their supplier is one of the nearly 68,000 approved enterprises. Buying goods in RMB may result in: A broader supplier base, given the preference for Chinese exporters to invoice in RMB More favourable and transparent pricing of goods Minimised FX risk by funding purchases with RMB funding Reduced supply chain costs

USD bn Foreign Ccy Trade Credit HKD Trade Credit RMB trade settlement in HK

Surge in RMB trade credit

Source: HKMA, Deutsche Bank

Along with import and export letters of credit, other familiar products are available for cash management and trade purposes. These include RMB nostro accounts to overseas Deutsche Bank branches, term deposits, real time gross settlement and a range of Deutsche Banks electronic FX trading and risk management products.

Try comparing RMB and USD invoices

Why not try comparing your costs of goods in USD and RMB terms to evaluate the benefits?

Relevance of trading in RMB for exporters to China

Companies exporting to China can now invoice their goods in RMB and receive payments in Chinese currency. These payments can also be freely moved between the parent company and the onshore subsidiary via a RMB account. Invoicing goods in RMB may result in: Growth in your onshore client base, given the preference for Chinese importers to pay in RMB The ability to minimize FX exposures related to any RMB costs incurred in the sales process Lower transaction costs associated with foreign FX conversion and regulatory approvals for funding onshore subsidiaries Reduced supply chain costs by recycling RMB received from sales to fund onshore operations Deutsche Bank A brief guide to offshore RMB


Award-winning* support for your global RMB trade needs

Deutsche Bank provides the full range of onshore and offshore RMB cash management, trade finance and trust and securities services

Why use Deutsche Bank for your RMB trade needs?

*Best Cash Management Bank, Asia Pacific 2011 (The Asset) Top-rated with best industry scores from crossborder clients in Asia and for emerging markets globally (Global Custodian Agent Bank Review 2010) Full suite of RMB cash management and trade finance products Comprehensive cross-border RMB products and services Leading trust and custody services for CNH assets Full corporate treasury support across RMB financing and risk management

18 A brief guide to offshore RMB Deutsche Bank

RMB roadmap
What do you need to consider before adopting the RMB?

Consideration Short-term
Pricing differential between onshore and offshore CNY curves Increase liquidity through RMB letters of credit

Open a CNH account to take advantage of favourable hedging and conversion rates and to set-up the new currency code in your treasury system Letters of credit discounting Evaluate financial benefits of using RMB with buyers/ suppliers as your trading currency in China Draw up a small list of payments and clients/suppliers to test RMB trade-related transactions Evaluate tools for hedging FX and interest rate risk with CNH


Assess longer-term benefits of CNH How do I best create a pilot process to test the benefits of using the RMB? What hedging opportunities are available to me?


Full integration of CNH into the Use CNH for netting RMB cash management process payments and for cash management systems Financing Evaluate CNH bond, loan and equity markets for best source of financing

Deutsche Bank A brief guide to offshore RMB


20 A brief guide to offshore RMB Deutsche Bank

Keeping informed
Deutsche Bank is committed to keeping its clients informed on the latest developments in RMB internationalisation.

Deutsche Banks fixed income and foreign exchange strategy teams produce a fortnightly report, The CNH Market Monitor, which provides corporations and investors with insight and perspective on the latest regulatory reforms, market developments, financing conditions and other key factors influencing Hong Kongs CNH market. To receive the report and keep informed, please contact our research team or speak with your Deutsche Bank representative: Linan Liu, Greater China Interest Rate Strategist +852 2203 8709 Dennis Tan, Asia FX Strategist +65 6423 5347 Sameer Goel, Head of Asia Rates & FX Research +65 6423 6973

Deutsche Bank A brief guide to offshore RMB


First branch in China 1872. Locally incorporated 2008.

With a deep onshore presence in China, Deutsche Bank provides a comprehensive range of products and services to suit your needs

Why use Deutsche Bank for your RMB trade needs?

Locally incorporated in China Branch offices in Beijing, Shanghai, Guangzhou, Chongqing, Tianjin Domestic securities presence through securities joint venture, Zhong De Securities 30% stake in leading Chinese asset manager, Harvest Funds Management 19.99% stake in Huaxia Bank One of the first banks to trade RMB FX options onshore First bank to trade credit default swaps onshore in China

22 A brief guide to offshore RMB Deutsche Bank

Key contacts
Debt capital markets Patrick Tsang, Head of Fixed Income Capital Markets, Asia +852 2203 8331 CNH remittance Daisy Cao, Senior Relationship Manager, China +86 21 3896 2686 Foreign Exchange Jens Scharff-Hansen, Co-Head of FX Trading, Asia +852 2203 8533 Reid Hamilton, Head of Cross-Border Client Coverage and Risk Advisory, Asia +852 2203 8506 Rates Xiang Hong, Deputy Head of Global Rates Greater China +852 2203 6452 Transaction Banking Eric Koo, Head of Global Transaction Banking, Hong Kong and Head of Trade Finance, Greater China +852 2203 8588

MARKETING MATERIAL. This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank AG and/or its affiliates (DB). Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on any specific final documentation relating to a transaction and not the summary contained herein. DB is not acting as your legal, financial, tax or accounting adviser or in any other fiduciary capacity with respect to any proposed transaction mentioned herein. This document does not constitute the provision of investment advice and is not intended to do so, but is only intended to be general information. Any product(s) or proposed transaction(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives, needs and circumstances, including the possible risks and benefits of entering into such transaction. For general information regarding the nature and risks of the proposed transaction and types of financial instruments please go to You should also consider seeking advice from your own advisers in making any assessment on the basis of this document. If you decide to enter into a transaction with DB, you do so in reliance on your own judgment. The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance does not guarantee or predict future results. This material was prepared by a Sales or Trading function within DB, and was not produced, reviewed or edited by the Research Department. Any opinions expressed herein may differ from the opinions expressed by other DB departments including the Research Department. Sales and Trading functions are subject to additional potential conflicts of interest which the Research Department does not face. DB may engage in transactions in a manner inconsistent with the views discussed herein. DB trades or may trade as principal in the instruments (or related derivatives), and may have proprietary positions in the instruments (or related derivatives) discussed herein. DB may make a market in the instruments (or related derivatives) discussed herein. To the extent that Deutsche Bank agrees to transact on a principal basis by committing its proprietary capital to purchase or sell securities, Deutsche Bank may, in accordance with applicable rules and regulations, effect hedging transactions to mitigate the risk incurred in connection with such a principal transaction. These hedging transactions may be effected before the principal transaction is executed in full and may impact the prices at which securities are purchased or sold in the principal transaction. Sales and Trading personnel are compensated in part based on the volume of transactions effected by them. DB seeks to transact business on an arms length basis with sophisticated investors capable of independently evaluating the merits and risks of each transaction, with investors who make their own decision regarding those transactions. The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document, in whole or in part, without our express written permission. DB SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF. DB is authorized under German Banking Law (competent authority: BaFin - Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. In the US this document is approved and or distributed by Deutsche Bank Securities Inc., a member of the NYSE, FINRA, NFA and SIPC. You should note that the Renminbi is not a freely convertible currency. All payments in respect of Renminbi will be made solely by transfer to a Renminbi bank account maintained in Hong Kong in accordance with prevailing rules and regulations. DB cannot be required to make a payment by any other means (including in currency or by transfer to a bank account in the Peoples Republic of China). In addition, there can be no assurance that access to Renminbi funds for the purposes of making payments in respect of this transaction or generally may not remain or become restricted.

Deutsche Bank A brief guide to offshore RMB


Deutsche Bank Capital Markets & Treasury Solutions

October 2011

Partner with the market leader in CNH

Deutsche Bank CNH fact sheet

Deutsche Bank continues to play a key role in the development of Hong Kongs offshore Renminbi market. Across debt capital markets, credit trading, foreign exchange and transaction banking, we have the market presence and insight you need.
Debt capital markets and credit trading
Top-3 arranger of CNH bonds with 9.1% market share (year to Oct 2011, Bloomberg) First-ever investable benchmark CNH bond index (DB ORBIT) Leading market maker in CNH bonds (broker estimates) Arranger of largest-ever CNH corporate bond deal (CNH3.5 bln Sinochem Jan 2014s) Arranger of first European MNC CNH deal (CNH300m Unilever Mar 2014s) #1 arranger of synthetic RMB bonds with 30% market share in 2011 (Dealogic)

Foreign exchange
Transacted first CNH cross-currency swap, FX swap and FX forward Leading market maker (broker estimates) First bank to launch electronic trading of CNH (via Autobahn FX) Leading provider of structured CNH FX products Asias dominant FX house with over 20% market share (Euromoney)

Transaction banking
Full suite of cash management and trade finance products Comprehensive cross-border products and services Leading trust and custody services for CNH assets Full corporate treasury support across financing and risk management

Deep onshore presence in China

Locally incorporated in China with offices in Beijing, Shanghai, Guangzhou, Chongqing, Tianjin Domestic securities presence through joint venture, Zhong De Securities One of the first banks to trade FX options and FX forwards onshore in China First bank to trade credit default swaps onshore in China Present in China since 1872

CMTS: CNH remittance: Credit trading: FX: GTB: Patrick Tsang Di Mu Vishal Goenka Jens Scharff-Hansen Eric Koo +852 2203 8331 +86 21 3896 4889 +65 6883 0666 +852 2203 8533 +852 2203 8588