Tools to integrate RMB into your business
- To protect against rising interest rates if you borrow RMB onshore or offshore.
- To protect against volatility in the commodities market.
Payment Decision – Price Discovery
- Pricing information can be obtained from your bank contact – vendor tools can also assist with the price discovery process.
- Price discovery and analysis can assist in making a payment or hedging decision.
Some steps in the price discovery process are:
- Have a view on rates – obtain a currency forecast. TIP: To obtain a currency forecast type: FXFC <Go> on your Bloomberg terminal.
- Consider historical patterns – chart the spread between USD offshore deliverable RMB and CAD offshore deliverable RMB. TIP: To chart the spread between USD offshore deliverable Renminbi and the CAD offshore deliverable Renminbi type: CADCNH <Curncy> USDCNH <Curncy> HS <Go>
- Decide on term of hedge and ensure there is adequate liquidity – compare spot and forward exchange rates. TIP: To calculate spot and forward exchange rates use FRD <Go>.
Options for managing RMB exposure
Company XYZ exports pulp and paper to China. They have non-RMB liabilities and RMB revenues.
- Do nothing – retain FX exposure if short-term view is that RMB will appreciate.
- Completely hedge using a cross-currency swap – hedging the currency back to the base currency.
- Enter into a call option – company would benefit from some RMB appreciation but still be hedged against downside risk.
- Enter into a call spread – appreciation is capped but premium paid on option is reduced.
To access liquidity:
FRD <Go> on Bloomberg displays and calculates spot and forward exchange rates as well as forward points for a pair of currencies.
XCRV <Go> graphs current and historical market levels for a variety of FX term structures.
Foreign exchange markets for RMB
Three distinct foreign exchange markets are available for trading RMB:
- The onshore deliverable CNY market. This market is very liquid but regulations restrict access.
- The offshore deliverable CNH market. Liquidity in this market has gained momentum.
- The offshore non-deliverable forward market.
Understanding interest rates
- Interest rates are different onshore and offshore both for deposit and lending rates. In general, onshore rates are lower than offshore rates.
- Shanghai Interbank Offered Rate (“SHIBOR”) has become the market standard to price floating interest rate swaps in China. It is fixed at 11:30am Beijing time.
- CNH Hong Kong Interbank Offered Rate (“CNH HIBOR”) is the offshore benchmark. It is published at 11:15 am Hong Kong time.
- TIP: To access the CNH HIBOR Fixing Page on Reuters type: CNHFIX=
- TIP: To access the CNH HIBOR Fixing Page on Bloomberg type: FIXI CN <Go>
As onshore and offshore rates converge, the benefits of onshore pricing decreases. Corporates can trade with their local bank in their time zone in the offshore market without paying a hefty premium.
- TIP: To chart the spread between onshore and offshore type CRVF <go> on Bloomberg.
RMB deposits can be invested locally – short term funding options
So that corporates and individual investors outside of China can access RMB-denominated investment options for their excess RMB, financial firms in North America are developing deposit accounts and investment products. Outstanding offshore RMB bonds and corporate deposits (“CDs”) reached RMB 107.2 billion and RMB 31.6 billion respectively in April 2015.
Several Canadian Financial Institutions offer term deposits in RMB – these are offered at an agreed term and interest rate.
Yields in China are much higher than those in Canada and the U.S. As shown to the left, at May 6, 2015, China government 1 year bond yields were 2.841%, Canada government 1 year bond yields were 0.714%, and U.S. government 12 month bond yields were 0.237%.
Longer-term funding options
- With the steady internationalization of the RMB more corporates are using the RMB to diversify their funding sources.
- RMB-denominated funding can be particularly compelling for companies who conduct a significant percentage of their transactions in or have income linked to RMB.
- The dim sum market provides investors a higher return to their Canadian and U.S. dollar equivalents and bonds can be purchased with issuers they are familiar with.
- As of April 30, 2015, there are over CNH 107 billion in dim sum bonds outstanding.
- A less used funding avenue is the bank loan market.
- The launch of the RMB HIBOR rate in the Hong Kong market should encourage greater use of syndicated loans denominated in RMB.