What Does the Mutual Market Era Mean for Fixed Income and Currency? - - PowerPoint PPT Presentation

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

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1

IPO Era

• Key growth driver in the

past 20 years

• Primary offshore equity

capital formation centre

• Markets remained

segregated 2

3 Opening Up Era

• Internationalisation of RMB
• Development of Free Trade Zones
• International investors are invited in
• Domestic investors are

allowed out

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1993 - 2009 2001 - 2010 2010 - 2014 2015 and beyond HK & International Market

Mainland Market

Mutual Market

China’s opening up over time presents both opportunities and challenges for Hong Kong as an IFC

1 3

Domestic Growth Era

• International funds flowed into the

Mainland from IPO proceeds

• Domestic capital markets began to

develop and rose fast in both scale and depth

• Equity derivatives and Commodities

products turnover is already leading the world

• Launch of QFII and QDII

2

Mutual Market Era

• SH-HK Stock Connect
• Internationalisation at China’s doorstep
• Same time zone & home market rules
• RMB
• Exchanges in the Mainland and HK will

become “gateways” on each side

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What is the Potential of the Chinese Bond Market?

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Chinese Bond Market Breakdown Market Asset Allocation

Interbank US$5,091bn (90%)

3.1x 1.0x 0.3x

China is already the third largest bond market in the world, but the potential growth remains enormous

Bond Outstanding / Bank Deposits:

ADT

(% of market) US$ 20.2bn

(92%)

US$ 1.8bn

(8%)

<US$ 0.1bn

(<0.1%)

Regulator Size

(% of market)

Bond Types

PBOC US$ 5,091bn

(90%)

• Treasuries
• Municipal
• Policy bank
• Corporate
• MTN
• CP
• Government-

backed institutional bonds

• ABS

CSRC US$ 471bn

(8%)

• Treasuries
• Municipal
• Corporate
• ABS
• CB

CBRC US$ 113bn

(2%)

• Treasuries
• Corporate
• Government-

backed institutional bonds

Interbank Exchange OTC

Source: Chinabond, Wind, SSE, SZSE, ECB, PBOC, FDIC, WFE

RMB’s Market share in Global Trade Settlement Average Daily FX Turnover in RMB Quotas for Entering Mainland Market

How is Exposure to Chinese FIC Markets Growing Offshore?

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RMB becoming globally accepted – and more investors will need to manage their risk exposure to it

#28 #19 #15 #9

Offshore RMB Bonds Issuance

(US$ bn)

Global Rank:

#17 #14 #8 #5

Global Rank:

(RMB bn) (RMB bn) Source: Standard Chartered Research, SAFE, BIS, SWIFT

Bonds CD Formosa

RMB use in global trade RMB Invest- ment Assets

CAGR: 44%

Approved quota Utilised quota (estimated apart from Stock Connect)

770 436 312 300

Hong Kong’s potential as an FIC hub is driven by its unique connection to China Catalysts for Hong Kong in FIC RMB Deposits in Hong Kong

Hong Kong is Poised to Benefit…

Increasing international exposure to onshore China bonds Greater two-way RMB FX volatility resulting from FX reforms RMB interest rate liberalisation Clearing mandates expected in OTC FIC derivatives Potential expansion of “Stock Connect” schemes Development of an offshore RMB loan market

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Dim Sum Bonds Outstanding in Hong Kong

CAGR: 56% CAGR: 66%

Other offshore RMB centres pose competition for Hong Kong

Hong Kong Singapore Taiwan UK France Luxembourg Australia

• S. Korea

Financial Metrics

RMB deposits (RMBbn)

981 260 300 15 20 60 50 120

RMB bonds in issue (RMBbn)

455 15 31 15 < 10 < 10 < 10 < 10

RMB FX turnover (% of global total)

33.5% 16.2%

• 16.5%

0.8% 0.3% 0.6% 0.1%

RMB payments (% of offshore total)

78.6% 4.0% 2.4% 5.6% 1.8% 0.8% 1.1% 0.4%

Trade with China (% of China’s total)

8.8% 1.8% 4.4% 1.6% 1.3% 0.1% 3.2% 6.6%

Infrastructure

RMB clearing bank

       

PBOC swap line

       

RQFII quota

       

RMB derivatives

       

Sources: PBOC, MoCom, BIS, HSBC, Standard Chartered

…but is Not Alone

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How Can Hong Kong Establish a Unique FIC Role?

Hong Kong’s Value Proposition

Offshore RMB Risk Management Hub of Choice Futurisation of Key China FIC Benchmarks Platform for Eventual Mutual Market Access in FIC

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• RMB currency pairs
• Onshore interest rate and bond benchmarks
• Offshore-onshore convergence
• Liquidity centre for wide range of RMB derivatives products
• Support central clearing of OTC products
• International risk management & legal regime
• RMB-ready investors and intermediaries
• Links to global payment and collateral infrastructure
• Comfortable trading venue for ‘Southbound’ investors

Hong Kong needs to carry its early momentum to the next level of development

The Role of FIC in HKEx’s Strategy

E Q U I T I E S

L M E RMB Risk Management RMB Market Reform Asia Commo- dities Mutual Market Access FIC Products OTC Clear

C O M M O D I T I E S

Clearing & Commercialisation



Policy-driven liberalisation of

• nshore FX and rates



Use of RMB as funding and investment currency globally Fixed Income and Currency



China’s unmet commodity risk management needs



Growing global relevance of China’s commodity benchmarks Commodities



Confluence of onshore and

• ffshore investors trading the

same markets



Accumulation of RMB assets

• utside China

Equities

FIC is central to creating a holistic value proposition for Hong Kong to ride on China’s opening up

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What’s Next?

Bonds FX Rates

• Risk management tools for those accessing the
• nshore bond market
• Enhancement and extension of CNH futures
• Opportunities arising from CNH-CNY convergence
• Derivatives on onshore and offshore benchmarks
• Synergies with OTC Clear product offering

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Thank You

HKEx Group Website: www.hkexgroup.com HKExnews Website: www.hkexnews.hk

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