2.2 RMB transactions in international financial market

The usage scope of international currency is not limited to the international trade,

but also includes the international financial markets.Currency's being widely used as

instrument of payment is also a reflection of internationalization degree.

2.2.1 Foreign exchange market

The foreign exchange market is an important composer of international financial market and the scale and structure of foreign exchange transactions can comprehensively reflect a currency's supply and demand situation and also its attention and recognition by the world.

With the rapid development of China's economy and rising international position,RMB has more influence power around the globe and the scale of RMB transactions increases remarkably.In 2010,when the international economy was severe and complicated and the turmoil of main currencies such as USD,EUR and JPY intensified,the pricing mechanism of RMB improved and flexibility and volatility increased.Under the strong prediction of RMB appreciation,the trade amount of RMB in foreign exchange market climbed up quickly.

According to the BIS,among the 2010 world foreign exchange transactions,RMB transactions took up a share of 0.9%.Although RMB sale is far lower than that of USD,EUR,JPY,CHF,compared with 2001,the scale of RMB transactions in 2010 had multiplied nearly 10 times (Table 2—2),exceeding the speed of main currencies.

Note:Double counting of both sides；Total amount ratio 200%.

Source: The Bank for International Settlements (BIS).

According to the statistics in April 2010 from BIS,the scale of RMB transactions in the OTC foreign exchange market reached 34.261 billion dollars,among which spot transactions,forward transactions,forward transactions,exchange swaps,currency swaps and foreign exchange options accounting for 23.71%,41.59%,19.92%,0.19% and 19.50% respectively(Table 2—3).Because of the continuous appreciation of RMB,the forward transactions and options increased rapidly to avoid risks,setting the forward transactions as the uppermost trading instrument in RMB foreign exchange market.The scale of interbank RMB foreign exchange derivatives market in 2011 was 1 990 billion USD,increasing by 50.9% from 2010 and taking over one third of interbank foreign exchange market.

Source:The Bank for International Settlements (BIS).

Besides innovation of RMB derivatives,CFETS also increased the currency trading instruments to enlarge the trading scope of RMB exchange.With the expansion of trading scale of Chinese enterprises with Australian and Canadian enterprises,the settlement demand of Australian and Canadian dollars climbed up.In November 2011,China interbank exchange market successively increased the direct trade of Australian and Canadian dollars to RMB with trading instrument including spot exchange,forwards and swaps.Currently,nine currencies have been added to the Chinese foreign exchange market trading instruments.In December 2011,Chinese started the RMB to Thai Baht interbank regional trade,improving the structure of foreign currency market.

Outside China,to meet the demand of each government,enterprise and investor's growing demand of RMB,the international financial institutions brought about RMB foreign exchange products one after one.In March 2011,BOA Shanghai branch signed four RMB swap contracts with an Asian food international company,starting the first exchange swap priced in RMB.In August of the same year CME started the brand new RMB foreign exchange forwards contract with reference to non delivery forward(NDF) in the attempt to lock the volatility of exchange rate of USD to RMB.This contract increases the RMB overseas investment channels and effectively prompts the development of RMB capital market.However,the non delivery forward of RMB which is re—gulated would be likely speculated by hot money,resulting in the big fluctuation of NDF,and causing influence and pressure on RMB exchange rate in the future from outside.

2.2.2 Stock market

RMB stock market has made great progress in 2011.On April 29,2011,the first Hong Kong REIT,Huixian REIT,is traded on Hong Kong Exchange.As the first offshore RMB IPO,Huixian REIT had a significant meaning to the Hong Kong offshore market development and RMB internationalization.It initiated the new asset type of offshore market RMB—dominated stock and signaled that the RMB—dominated stock market has stepped into a new stage.Huixian REIT's trading situation is shown in Table 2—4.With the deve—lopment of offshore market RMB—dominated stock,RMB—dominated stock trades have played more and more important roles in the global stock market.

Source:Shanghai Stock Exchange,Shenzhen Stock Exchange and Hong Kong Exchange.

From 2008,the trading scale of stock markets around the globe all began shrinking.After the year of 2009,the world stock market's trades began to rise again among which RMB—dominated stock scales grew at a high speed. Although the scale of RMB—dominated IPO declined quickly,currently,RMB—dominated stock takes the share of 10% of the stock trades scale in the whole world,10 times the size of 2005.RMB—dominated stock has already become a new force of world stock trades with its market value ranking the second globally.

2.2.3 Derivative market

The development of RMB derivative market and RMB internationalization supplemented each other.The development of RMB derivative market can manage the RMB financial products' interest rate,exchange rate risk and credit risk effectively,which will boost the confidence of the international society to hold RMB asset in the perspective of maintenance and appreciation of value,so as to promote the internationalization of RMB.The high degree of RMB's internationalization and the overseas RMB deposits’ expansion will stimulate the market's demand of RMB derivatives.

In the opening progress of Chinese capital projects and RMB internationalization,the interest risk and exchange rate risk intensified.The intention to avoid the market risk increased the demand of RMB derivatives,grew and promoted the market's development.

There are three characteristics presented in the 2011 RMB derivative market:

1.Small scale with global market share less than 1%.

According to the statistics of BIS,up till December 2011,the world interest rate derivatives OTC market unliquidated balance reached 504 trillion USD,with the average growth rate of 19.5% from 2001 to 2011,among which USD,EUR,GBP,JPY and CHF took the share of 32.1%, 36.6%, 8.6%, 13.3% and 1.1% while RMB's share was less than 1% (Figure 2—6).

Figure 2—6 Interest rate derivatives OTC market share in December 2011

Source:The Bank for International Settlements,BIS.

In the equity derivative OTC market,the European,American and Japanese equity took up the share of 43.49%,32.36% and 10.82%,ranking the top 3 in the world.China's equity derivative products belonged to the other Asian countries and took up the share of no more than 1%(Table 2—5).

2.Rapid development and lively transaction.

In 2011,the uncertainty of overseas and national macro economy increased and the demand of risk management rose,leading to the rapid development of

Source:The Bank for International Settlements (BIS).

RMB derivative market and lively transactions.Currently,the RMB derivatives in the Chinese interbank market mainly include the interest rate swap,interest rate forwards and bond forwards(Table 2—6).

Source:CFETS.

According to the statistics of CFETS,the interbank RMB interest rates swap market had deals of 2 700 billion yuan in 2011,increasing by 78.4% year on year with 83 parties engaged in the deals.The fixed interest rate and floating interest rate swaps have become the main products in Chinese interest rate derivative market.

At the same time,the interest which the floating interest rate swap refers to has added more breeds in multiple tendency.In 2011,Besides FR007 (7—day repurchase fixed interest rate) and Shibor—3M (3—month Shanghai interbank lending interest rate) and one—year fixed deposit interest rate,the reference interest rate of RMB interest rate swap has added the loan interest rates of six months,one year,more than five years and 7 days Shibor.

In March 2011,CFETS promoted the interest rate swap trades confirmation business in the electronic way,provided electronic confirmation platform through currency trade system and issued the uniform conformation letters and an effective,standardized and authorized trading confirmation system,which pushed up the rapid development of RMB interest rate swap market.Up till the end of 2011,42 financial institutions did the electronic confirmation through trading system,taking the share of 80%.

Compared with RMB interest rate swap products,the interbank bond forwards and interest rate forwards markets had small scale with the trading volume of 103.01 billion and 0.3 billion yuan.

3.Strengthened market regulation.

In January 2011,CBRC officially issued the Interim Management over Financial Institution Derivative Products Trades in Banking Industry and set the layered regulatory structure of derivatives,which was significant to our national derivatives market's health and steady development and improved marketing and pricing ability of banking around financial institution derivatives products and also regulation around the sales of derivatives.Influenced by the risk capital's strengthened restraints,the active degree of trading in RMB derivatives market declined in a short time.

2.2.4 Overseas credit market

RMB overseas credit market is the foundation of RMB to become the financial trading currency.The development of the market is beneficial to enlarge RMB's usage in the world,to enhance the non—residents’ confidence to hold RMB and to increase the frequencies of trading between foreign trading enterprises to settle in RMB,creating good conditions for realizing the internationalization of RMB.

In 2011,China overseas RMB credit and Hong Kong RMB deposits had a notable growth compared with 2010.

As is shown in Figure 2—7,the 2010 Chinese financial institution's RMB lending overseas fluctuated from 10—20 billion yuan.The policy banks such as China Development Bank and Export—Import Bank of China are the main parties that lend RMB loans overseas.On January 13,2011,the People's Bank of China issued the Management over Overseas Directly Investment of RMB Settlement Pilot Areas,the 15th clause of which regulates:banks can follow the rules to lend RMB loans to the national institutions with overseas investment or projects.This policy stimulated the business demand of financial institutions to lend RMB loans to the overseas investment projects and greatly boosted the opening of the national RMB overseas loans.In January 2011,the overseas RMB loans increased quickly from 21.9 billion to 142.3 billion yuan,expanding more than five times.In the following 12 months,China's overseas RMB loan volume kept at about the level of 150 billion yuan every month.

In the past two years,the Hong Kong offshore RMB deposit development situation can be divided into three periods.Before June 2010,Hong Kong offshore RMB deposits kept the growth rate at lower than 10%.After Chinese government promoted a series of RMB new policies in June 2010,the Hong Kong RMB business flourished with deposits speeding up and shares rising to the highest 45.4% in October 2010.After May 2011,the Hong Kong RMB deposit growth rate fell below 10% again,even appeared the negative growth from October to December 2011.From the total amount,the Hong Kong offshore market RMB deposit rose nearly four times from the 63.95 billion yuan in the beginning of 2010 to 314.938 billion by the end of 2010.Till December 2011,the Hong Kong RMB deposits have reached 588.5 billion yuan.

Although RMB overseas loans and RMB deposits at the Hong Kong offshore market had an immense growth in the absolute value,until the end of 2011,the above two scales did not exceed 1% of domestic RMB deposits’ scale,insignificant still.

Figure 2—7 RMB monthly credit balance in 2010—2011

Source:The People's Bank of China,Hong Kong Monetary Authority.

2.2.5 International bond and bill market

In 2011,RMB international bond and bill issue amount grew rapidly with their shares among the international bond and bill balance rising steadily.As is shown in Figure 2—8,with the enlargement of pilot areas of RMB cross—border trade settlement and Hong Kong RMB offshore market,RMB international bond and bill balances’ share among the global bonds and bill scale boomed from the fourth quarter of 2010 with the highest growth rate of more than 40%.Afterwards,the RMB international bonds’ issue scale growth slowed down and in 2011,the RMB international bonds and bill balances growth rate kept around 25%.

Figure 2—8 RMB international bonds and bills balance and increase in 2010—2011

Source:The Bank for International Settlements (BIS).

RMB international bonds and notes held a small percentage of global shares, proportion of balance was 0.16% in 2011, far behind the world's major currency. During that period, USD and EUR held over 40% in global share of international bonds and notes, GBP got 7.44%, JPY got 2.73%, even inferior internationalized CHF got 1.40%(Figure 2—9).

The proportion of RMB international bonds and notes circulation got 0.42% in global market, over twice of the balance proportion (Figure 2—10). The circulation of RMB international bonds and notes increased rapidly and obviously in 2011,thus enhanced the influence of RMB in global bonds and notes market.

Figure 2—9 International bonds and bills balance in 2011

Source:The Bank for International Settlements (BIS).

Figure 2—10 Issue amount of international bonds and bills in 2011

Source:The Bank for International Settlements (BIS).

What's different with RMB domestic bond market which mainly is composed of

government bonds and policy—related financial bonds in product structure is that corporate bonds are the main products of RMB international bond market.As is

shown in Table 2—7,up till the fourth quarter of 2011,the Hong Kong RMB bonds

issued mainly corporate bonds whose stock took a share of 63.2% and whose amount took a share of 72%.After August 2011,more and more domestic enterprises went to Hong Kong to issue the RMB bonds and thus the scales of domestic institutions issuing RMB bonds kept rising.Because of the interest rate gap between the offshore RMB bonds and the onshore RMB bonds,the inland enterprises enjoyed the low cost to issue the offshore RMB bonds,which encouraged the issue of RMB bonds in Hong Kong.

Source:Hong Kong Monetary Authority.

2.2.6 Offshore financial market

The history of international currency development can tell that the main currencies’ internationalizations accompany their onshore and offshore,especially offshore market's development.According to the data of BIS,in 2010,about 80% of the USD and EUR's exchange trading volume (including derivatives such as the spots,forwards,swaps and options) happened in the offshore market.In the meantime,about 72% of JPY trading volume happened in the offshore market of Japan.

Constructing the RMB offshore market has significant meanings to the internationalization of RMB.Hong Kong is the first non—mainland area that provides the RMB deposits,exchange and remittance businesses.Hong Kong RMB business started in 2004,and RMB liquidation service was provided by the specialized liquidation bank.Afterwards,the Hong Kong RMB business enlarged continuously,including the RMB cross—border settlement pilot and financing banking business for trades,RMB bonds issued in Hong Kong by the Treasury and mainland financial institutions and RQFII systems etc.These policies were strong impetus to the construction of Hong Kong offshore RMB market.There was a great progress in Hong Kong offshore RMB market,especially in the RMB deposits and international bonds issue.

Cross—border trading RMB settlement business directly prompted the Hong Kong offshore RMB deposits.According to the People's Bank of China and HKMA,the cross—border trading RMB settlement business had accumulated amount of 2 080 billion yuan in 2011,and the direct investment of RMB settlement had 110.9 billion yuan.Consequently,the Hong Kong offshore RMB deposits scale has reached 588.529 billion yuan,about 9% of the total deposits amount.

In July 2010,the People's Bank of China revised the Hong Kong RMB settlement contract and relaxed the opening account of enterprises,interbank transfer and RMB exchange.Afterwards,the Hong Kong RMB deposits had a strong growth(Figure 2—11). The RMB deposits have increased from 103.684 billion yuan in July 2010 to 572.177 billion yuan in July 2011,about six times of growth.From the fourth quarter of 2010,after a high speed growth,the Hong Kong RMB deposits began to slow down.In the first half of 2011,the Hong Kong RMB deposits had an average growth rate of 10% and the average monthly growth rate 2% over the whole year due to the slow down by the end of the year.

Figure 2—11 RMB deposits in Hong Kong in 2010—2011

Source:Hong Kong Monetary Authority.

Hong Kong is the main place for the RMB international bond to issue.In January 2007,the People's Bank of China firstly regulated that the domestic financial institutions can issue RMB bonds after being approved.In June of the same year,the People's Bank of China and State Development and Reform Commission (NDRC) jointly issued the Interim Management over Domestic Financial Institutions Issuing Bonds in Hong Kong.In the same month,the China Development Bank issued the first RMB bond in Hong Kong. Afterwards,the issue amount of Hong Kong RMB bonds climbed up every year (Figure 2—12).There are “Dim sum bonds” and “Synthetic bonds”（注:“Dim sum bonds” refers to the RMB—dominated bonds issued in Hong Kong.“Synthetic bonds” refers to the RMB—dominated bonds which are settled in USD.） issued in Hong Kong.In 2011,influenced by the prediction of RMB appreciation,more and more institutional investors participated in the allotment,causing the tight market of Hong Kong RMB bonds.

Figure 2—12 Issue amounts of Hong Kong RMB bonds in 2010—2011

Source:The Hong Kong Exchange.

In October 2011,the Baosteel Group issued 6.5 billion yuan of RMB bonds in Hong Kong,the first company that gained approval to issue RMB bonds in Hong Kong.Before that,all the domestic enterprises operated through the overseas subsidiaries to issue overseas RMB bonds.Currently,some enterprises are applying to issue RMB bonds following Baosteel.

The issuers of Hong Kong RMB bonds also expanded rapidly.The bond issuers expanded from the initial inland financial institutions to the Ministry of Finance,subsidiaries of

the Hong Kong Bank,red—chip companies,Hong Kong capital—funded companies,multinational corporations and international financial institutions.