What Does the Mutual Market Era Mean for Fixed Income and Currency? James Fok, Head of Group Strategy 12 March 2015
Evolution of Hong Kong and Mainland Financial Markets Opening Up Era 3 • Internationalisation of RMB Mainland Market • Development of Free Trade Zones • International investors are invited in • Domestic investors are Mutual Market 2015 allowed out and beyond 4 IPO Era 1 HK & International 2010 - 2014 • Key growth driver in the Market past 20 years 3 Primary offshore equity • capital formation centre 2001 - 2010 Markets remained • 2 segregated Mutual Market Era 4 • SH-HK Stock Connect Domestic Growth Era 2 • Internationalisation at China’s doorstep • International funds flowed into the Mainland from IPO proceeds • 1993 - 2009 Same time zone & home market rules • Domestic capital markets began to • RMB 1 develop and rose fast in both scale • Exchanges in the Mainland and HK will and depth become “gateways” on each side • Equity derivatives and Commodities products turnover is already leading the world • Launch of QFII and QDII China’s opening up over time presents both opportunities and challenges for Hong Kong as an IFC 2
What is the Potential of the Chinese Bond Market? Chinese Bond Market Breakdown Market Asset Allocation Interbank Exchange OTC Bond Outstanding / Bank Deposits: 3.1x 1.0x 0.3x Size US$ 5,091bn US$ 471bn US$ 113bn (90%) (8%) (2%) (% of market) ADT US$ 20.2bn US$ 1.8bn <US$ 0.1bn (92%) (8%) (<0.1%) (% of market) Regulator PBOC CSRC CBRC • Treasuries • Treasuries • Treasuries Interbank • Municipal • Municipal • Corporate US$5,091bn • Policy bank • Corporate • Government- (90%) backed • Corporate • ABS institutional • MTN • CB bonds Bond Types • CP • Government- backed institutional bonds • ABS China is already the third largest bond market in the world, but the potential growth remains enormous 3 Source: Chinabond, Wind, SSE, SZSE, ECB, PBOC, FDIC, WFE
How is Exposure to Chinese FIC Markets Growing Offshore? RMB’s Market share in Global Trade Settlement Average Daily FX Turnover in RMB Global Rank: Global Rank: (US$ bn) #17 #14 #8 #5 #28 #19 #15 #9 RMB use in global trade Offshore RMB Bonds Issuance Quotas for Entering Mainland Market (RMB bn) (RMB bn) CAGR: 44% 770 Formosa Approved quota Utilised quota (estimated apart RMB from Stock Connect) CD Invest- 436 ment 312 300 Assets Bonds RMB becoming globally accepted – and more investors will need to manage their risk exposure to it 4 Source: Standard Chartered Research, SAFE, BIS, SWIFT
Hong Kong is Poised to Benefit… Catalysts for Hong Kong in FIC RMB Deposits in Hong Kong CAGR: 56% Increasing international exposure to onshore China bonds Greater two-way RMB FX volatility resulting from FX reforms RMB interest rate liberalisation Dim Sum Bonds Outstanding in Hong Kong Clearing mandates expected in OTC FIC derivatives CAGR: 66% Development of an offshore RMB loan market Potential expansion of “Stock Connect” schemes Hong Kong’s potential as an FIC hub is driven by its unique connection to China 5
…but is Not Alone Hong Kong Singapore Taiwan UK France Luxembourg Australia S. Korea Financial Metrics RMB deposits 981 260 300 15 20 60 50 120 (RMBbn) RMB bonds in issue 455 15 31 15 < 10 < 10 < 10 < 10 (RMBbn) RMB FX turnover 33.5% 16.2% - 16.5% 0.8% 0.3% 0.6% 0.1% (% of global total) RMB payments 78.6% 4.0% 2.4% 5.6% 1.8% 0.8% 1.1% 0.4% (% of offshore total) Trade with China 8.8% 1.8% 4.4% 1.6% 1.3% 0.1% 3.2% 6.6% (% of China’s total) Infrastructure RMB clearing bank PBOC swap line RQFII quota RMB derivatives Other offshore RMB centres pose competition for Hong Kong 6 Sources: PBOC, MoCom, BIS, HSBC, Standard Chartered
How Can Hong Kong Establish a Unique FIC Role? Hong Kong’s Value Proposition Liquidity centre for wide range of RMB derivatives products Offshore RMB Risk Support central clearing of OTC products Management Hub of Choice International risk management & legal regime RMB currency pairs Futurisation of Key Onshore interest rate and bond benchmarks China FIC Benchmarks Offshore-onshore convergence RMB-ready investors and intermediaries Platform for Eventual Mutual Links to global payment and collateral infrastructure Market Access in FIC Comfortable trading venue for ‘Southbound’ investors Hong Kong needs to carry its early momentum to the next level of development 7
The Role of FIC in HKEx’s Strategy C Clearing & Commercialisation O E M Q Market Reform L M Asia U Mutual FIC Products O I Commo- D M Market Risk Management RMB RMB T I I dities Access T OTC Clear E E I S E S Equities Fixed Income and Currency Commodities China’s unmet commodity risk Confluence of onshore and Policy-driven liberalisation of offshore investors trading the onshore FX and rates management needs same markets Use of RMB as funding and Growing global relevance of China’s commodity benchmarks Accumulation of RMB assets investment currency globally outside China FIC is central to creating a holistic value proposition for Hong Kong to ride on China’s opening up 8
What’s Next? Risk management tools for those accessing the Bonds onshore bond market Enhancement and extension of CNH futures FX Opportunities arising from CNH-CNY convergence Derivatives on onshore and offshore benchmarks Rates Synergies with OTC Clear product offering 9
Thank You HKEx Group Website: www.hkexgroup.com HKExnews Website: www.hkexnews.hk 10
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