The 4Q13 reading rose – What happened to the index  components?

The 4Q13 reading of DRIVE rebounded to 54.7 from 54.3 in 3Q13 (Chart 1). The increase came amid increasing business needs for  RMB. In 4Q13,  there was  a rebound in RMB customer orders and trade settlement, although the proportion of  companies using these was  below that from a  year  earlier (Chart 2). In terms of  RMB services  and products, more companies reported that they are  currently using or  will consider using RMB payment/receivables and RMB trade services  (Chart 3a  & 3b)  than in all the previous quarters. Interestingly, the general improvement in the usage of  RMB services  and products in 4Q13 came despite findings showing slightly poorer  business performance in  the previous 12 months and a more pessimistic business performance outlook for the next 12 months (Charts 4a & 4b).  This means that the speed and depth of RMB development in Hong Kong  hinges on  factors other than local  economic and business performance. As Hong Kong  is an  open economy, its  offshore RMB development should be evaluated in the broader context of international RMB development. To put this  into perspective, the 4Q13  survey  revealed that the initiation of  RMB trade settlement is equally split  among the Hong Kong companies surveyed (34%), their overseas customers (31%)  and their suppliers (28%)  (Chart 5). This means that the preferences of overseas players also  con- tribute to the RMB development of Hong Kong.  Arguably, the preferences of these external parties are  shaped in part by their country’s own pace of  RMB development. As such,  future surveys  will  continue to monitor Hong Kong’s corporate usage of RMB with a global view in mind.

Finally,  regarding access  to RMB finance, the perception about the ease of access remained fairly constant in 4Q13 compared to previous quarters.

Key findings and DBS insights

* Unless stated otherwise, figures in parentheses represent findings in the previous survey  (3Q13)

1. Business needs for RMB have  rebounded

• Business  needs for  RMB rebounded in 4Q13.  Some  35%  (24%)  of companies surveyed indicated that they had RMB customer orders/invoices in  the last  12  months, and 44%  (35%)  claimed that they would use RMB for these purposes in the next 12 months (Charts 2a & 2b)
• The usage of RMB is already quite common among large corporations (turnover >HK$1 billion). All of  the large corporations surveyed indicated that they had RMB customer orders/invoices and trade  settlement in the last 12 months

DBS insights

Business  needs for  RMB is a key indicator of actual RMB acceptance and usage levels  at the corporate level.  After tracking this  component for  five  quarters,  there is no evidence of an uptrend in RMB corporate penetration. In particular, the higher reading in 4Q13  compared to that of  3Q13  should be  not be  seen as an  improvement, as it is merely a recovery from the relatively weak results of 3Q13.

2. Usage of RMB services and products achieved record highs

• The number of companies that used any RMB products [1] rose  to 30% compared to 24%  in 3Q13 (Chart 6). 30%  (26%)  of companies said they are  currently using or will consider using RMB payment and receivables services  in  the next 12  months. The  number of  positive responses in  4Q13 is the highest to date (Chart 3a)
• 9% (4%) of companies said they are  currently using or will consider using  RMB trade services  in the next 12 months. The number of positive responses in 4Q13  is the highest to date (Chart 3b).  Of the companies that used trade services  (all currencies), 35%  (9%)  used RMB trade services in the past 12 months. Of those that used trade services  (all currencies) but are  not currently using RMB trade services,  6%  (1%)  will consider using them in the next 12 months

DBS insights

The percentage of companies using RMB services  and products in 4Q13 was the highest recorded to date. While  it is still too early  to say that this is the start of an  uptrend, the 30%  usage rate is quite significant in terms of offshore centre development.

3. Expansion of RMB corporate product  scope

• Most  companies were only  using simple RMB spot conversion for  their daily operations. The use of RMB for investment (2%), hedging (4%) or financing (1%) remained negligible
• Of those companies that used any RMB services or products, 36% (57%) used FX spot, but only 9% (10%)  had RMB-denominated structured in- vestment deposits and only  1%  (5%)  had RMB savings and chequing accounts (Charts 7a & 7b).
• However, companies using trade services  [2]  showed growing interest  in  RMB investment, finance and hedging products. Some  8%  of respondents had RMB investments in 4Q13  (vs. 1%  in 3Q); 7%  of  respondents had RMB financing in  4Q13  (vs. <1%  in  3Q),  and 12%  of respondents were using RMB hedging products in 4Q13 (vs. 3% in 3Q). In 4Q13,  more companies showed an  intention to use  RMB letters of credit (6%  intend to use  in the next 12 months vs. 1%  actual usage in the past 12 months), RMB term loans (5% in N12M vs. 1% in P12M) and RMB structured forwards (4% in N12M vs. 1% in P12M)
• In  the  RMB  financing  space,  interest  is  still  very  limited.  Just  1%  of  companies surveyed said they had been using RMB financing, and only 2%  indicated that they are  likely to use  RMB financing in the next 12 months

DBS insights

The  past five  quarters of  findings showed no  consistent trends in  the usage of  most RMB products. The  usage of  products such  as  structured investment deposits  (SIDs)  and  deliverable  forwards  fluctuated  from  quarter  to  quarter.

While  efforts to develop RMB products and related financial infrastructure can arouse corporate interest, a sustained take-up of RMB products ultimately de- pends on their business needs for RMB, which showed signs of increasing.

4. Usage options for RMB liquid assets are limited

• 35% (44%) of respondents held RMB as part of their liquid assets in the  past 12 months
• Most  companies are  only  using simple RMB spot conversions in their daily  operations, and not employing RMB funds in more sophisticated ways
• Most companies use the RMB they receive by either paying their suppliers, putting it into bank deposits or converting it to HKD

DBS insights

These  findings reflect that companies either did  not take advantage of short- term cash  management solutions or  did  not require such  solutions. This may also  indicate a lack  of  short-term liquid RMB investment products in the market. As RMB takes up  more and more of corporate liquid assets, both financial institutions and companies could begin to explore RMB liquidity management solutions or short-term investments.

Other findings

• RMB usage among Hong Kong companies is still limited, but is slowly increasing
• 33% (19%) of companies [3] reported that RMB assets as a percentage of the company’s liquid assets were more than 10% (Chart 8)
• 42%  (34%)  of companies [4] reported that RMB customer order/invoices accounted for more than 10% of their overall sales turnover (Chart 9)
• 29%  (24%)  of  companies [5] reported that RMB trade settlement ac- counted for  more than 10%  of  their total trade settlement services (Chart 10)

The outlook: favourable policy support  remains  the key driver behind corporate usage of RMB

• Despite a slightly more negative outlook for Hong Kong’s general business  environment in 4Q13  vs. 3Q13,  the corporate usage of  RMB saw some improvement in 4Q13
• Five quarters of findings showed no  consistent positive correlation be- tween the state of  the economy/business outlook and the actual/in- tended corporate usage of RMB
• Since RMB usage is still at an  early  stage, a positive economic outlook alone – without policy  catalysts – is insufficient to further incentivise usage
  • The  potential relaxation of  the personal RMB 20,000 conversion daily cap  would be  a  near-term catalyst for  Hong Kong’s  offshore RMB market
  • This, alongside other policy refinements, would increase Hong Kong’s RMB liquidity pool and lead to more innovation in RMB products
  • Personal  RMB  wealth  management  products  would  flourish  initially, followed by a gradual pick up in corporate usage

Key Charts & Graphs