Asia Hong Kong
Special Report
13 April 2011
China/Hong Kong Strategy
RMB offshore: asset
creation to accelerate
Jun Ma, Ph.D
Chief Economist
(+852) 2203 8308
jun.ma@db.com
Hui Miao, Ph.D
Strategist
(+852) 2203 5934
hui.miao@db.com
Wenjie Lu
Research Analyst
(+852) 2203 6187
wenjie.lu@db.com
Deutsche Bank AG/Hong Kong
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factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
Global Markets Research Company
RMB deposits in Hong Kong’s offshore market have risen six-fold to RMB400bn
over the past 14 months, but outstanding RMB assets (mainly bonds) are only
RMB80bn at present. Those who are bearish argue that the lack of RMB assets is
the key bottleneck for the offshore market, and believe that Hong Kong banks will
not benefit due to the lack of interest-earning assets. However, our view on the
outlook for the RMB offshore market is much more bullish.
We expect a major breakthrough in RMB asset creation when RMB FDI is
permitted in the near future. Under the forthcoming RMB FDI rule, restrictions
on corporates (especially foreign-invested companies) remitting RMB raised in HK
to the Mainland will be relaxed. Based on a MNC survey we conducted recently,
we believe this policy will spur demand for RMB lending, bond issuance and IPOs
in HK. We expect the outstanding amount of offshore RMB loans and bonds for
FDI purposes to grow ten-fold within two years.
Third-party use of RMB should be another very promising source of offshore
RMB asset growth in the medium term. “Third-party use” refers to foreign
companies borrowing RMB in HK and converting the RMB proceeds to a third
currency for use in another country, with currency risk hedged by a cross-currency
swap. A few recent deals indicate significant potential for this option. Based on
the experience of the Eurodollar and Euro-yen/Samurai markets, we estimate that
the third-party use of RMB has the potential to grow from the current few billion
RMB to RMB80bn by end-2012 and RMB600bn by end-2015.
HK’s RMB assets could grow ten-fold vs a likely five-fold increase in RMB
deposits in the next two years. We expect that, via RMB FDI, third-party use,
RMB trade financing, etc, HK’s RMB assets could grow ten-fold to RMB700bn by
the end of 2012, up from RMB70bn at end-2010. This pace would be twice our
projection of a five-fold increase in RMB deposits in HK to RMB2tn by end-2012.
HK banks’ NIM for RMB business may rise four-fold within two years. As a
result of rapid growth of RMB assets, HK banks should be able to earn a
significantly higher yield on RMB assets than the current 0.4% deposit rate. We
expect HK banks’ RMB business to see average NIM rise from about 20bps now
to around 80bps by the end of 2012.
Benefits for HK banks are not yet fully appreciated. We estimate that the rapid
RMB asset creation and resulting NIM expansion could boost the annual EPS
growth of the HK banking system by 5ppts to 20% in the next two years. For
BOCHK, the earnings upside could be three times that for the banking system
average, on our estimates. In addition, we believe RMB business will create
significant fee income for banks. In our view, most analysts – and the market –
have not yet factored in this asset creation potential.