With the increasing foreign exchange reserves in China, China's foreign exchange control is changing from "lenient entry and strict exit" to "strict entry and lenient exit". In terms of relaxing capital controls, the most effective way is to open a Standby Letter of Credit for financial institutions overseas to support enterprises' overseas financing business and encourage China enterprises to go abroad.
In mid-21, the State Administration of Foreign Exchange issued the Notice on the Management of External Guarantees of Domestic Institutions, which implemented the quota management of foreign currency guarantee financing letters issued by mainland banks overseas, that is, "internal guarantee and foreign loans"-the financing quota of external guarantees of banks should not exceed 5% of their own net assets.
Even with the above-mentioned quota control, the use of RMB to open standby letters of credit to guarantee the financing of overseas enterprises is still fully liberalized. After all, this measure is closely related to China monetary authorities' efforts to promote the internationalization of RMB.
The rise of arbitrage
The so-called RMB standby letter of credit financing procedure of "domestic insurance and foreign loans" is: Company A of the mainland will pledge a sum of RMB funds to the mainland bank in the form of time deposit, and the mainland bank will open a RMB standby letter of credit overseas based on the amount of the deposit to ensure that Company B of the overseas country will raise funds from overseas banks.
correspondingly, the offshore RMB market in China and Hongkong has developed rapidly. In July 21, the Bank of China and the Bank of China (Hongkong) supplemented and revised the RMB clearing agreement, which expanded the scope of application of RMB business. According to the revised agreement, any enterprise is allowed to open a RMB account independently; A particularly important breakthrough is that the transfer of funds between accounts for any purpose is no longer limited by whether it is related to trade settlement; Hong Kong banks are allowed to introduce RMB-related products, such as time deposits, RMB deliverable forward contracts, mutual funds and insurance products.
as a by-product of policy relaxation, related arbitrage came into being. A typical case is that an enterprise that processes high-grade cosmetics with raw materials has a registered capital of 2 million yuan, and its balance sheet over the years shows that its working capital (currency needed for operation) has never exceeded 5 million yuan, and its net assets are just over 3 million yuan. The total assets are only 12 million yuan. However, it raised RMB 2 million in cash at one time and pledged it to a bank in the mainland, and opened a letter of credit with a corresponding amount of RMB in favor of overseas affiliates to finance overseas. The mentality of betting on the spread and exchange difference between foreign currency and RMB is obvious.
On the macro level, there is a competitive relationship between the regional branches of the Bank of China and the financial offices of coastal cities in promoting cross-border RMB trade settlement business. This is not only a matter of work performance and face, but also involves issues related to the positioning of urban functions such as international financial centers and RMB trade settlement centers.
due to the natural advantages of Shenzhen and hong kong, many mainland headquarters of hong kong companies are located in Shenzhen, which also leads to obvious regional characteristics in the ranking of cross-border RMB settlement in China, namely, Shenzhen ranks first, Beijing ranks second and Guangdong ranks third (excluding Shenzhen).
In June, the 21 China Regional Financial Operation Report released by the Bank of China showed that Shenzhen banking industry was at the national leading level in developing cross-border RMB trade settlement business. By the end of 21, 6,82 cross-border RMB businesses had been handled, amounting to 117.99 billion yuan, up 6.2 times and 169.3 times respectively from the end of the previous year, accounting for 2.3% of the country's total, ranking first.
The scale is not small
Because the RMB standby letter of credit belongs to the "off-balance-sheet account" on the bank's balance sheet, that is, "Contingent liability", the original intention is to have or not, a kind of debt that is temporarily uncertain for the actors, and the monetary authorities in China are laissez-faire on the premise of pushing for RMB cross-border trade settlement, so the total amount of RMB standby letter of credit financing for "domestic insurance and foreign loans" cannot be underestimated. Although it is difficult to find out the specific figures, we can speculate in the following four aspects:
1. According to senior executives of domestic banks, under the current situation that domestic credit lending is tightening and the RMB deposit reserve ratio has reached a record high, this kind of business of holding RMB in the mainland and lending foreign currency overseas has become so popular that it has become the main business promoted by the bank, so that the annual credit financing quota agreed between the bank and many overseas banks has been exhausted one after another. Among them, enterprises think that they can arbitrage, while commercial banks are under pressure to absorb RMB deposits under the tightening of credit.
2. On May 19th, 211, an official of the Bank of China said that "the most important cross-border RMB trade settlement business promoted by the central bank reached 5 billion yuan last year, accounting for about 2% of China's total import and export trade. In the first four months of this year, it has reached 53 billion yuan, exceeding the whole year of last year, accounting for 5% of the import and export trade volume in the same period. " The explosive growth of cross-border RMB trade settlement business can be seen. There is no statistics on how much financing of "internal insurance and foreign loans" is mixed.
3. In the past 3 years, due to China's strict foreign exchange control measures, the affiliated enterprises of mainland enterprises in Hong Kong were forced to settle foreign exchange and lacked foreign currency assets mortgaged to local banks. Therefore, it is difficult for them to raise funds in Hong Kong, but now they have turned around. According to the data of the Hong Kong Monetary Authority in April, the loans to non-bank customers in the Mainland increased by 444 billion Hong Kong dollars at the end of 21, with an increase of 47%, mainly in US dollars. At the same time, it is also revealed that the main way to obtain loans from non-bank customers in the Mainland in Hong Kong is to use the RMB standby letter of credit issued by mainland banks as a guarantee.
Chen Delin, President of the Hong Kong Monetary Authority, pointed out that these borrowers are mainly large state-owned enterprises in the Mainland, red-chip companies or their subsidiaries, or companies owned by provincial (municipal) governments. Among them, "about 6% is fully mortgaged by bank deposits in the Mainland, or guaranteed by major mainland banks." Due to the sharp increase in loans to non-bank customers in the Mainland, the total loans of banks in Hong Kong increased by 94 billion Hong Kong dollars in 21, an increase of 29%.
According to the quarterly report released by the Hong Kong Monetary Authority on June 14th, in the first quarter of this year, the loans of non-bank Chinese enterprises in Hong Kong's overall banking industry increased from HK$ 1.621 trillion to HK$ 1.799 trillion, with an increase of 11%, and the proportion of total assets increased from 11.6% to 12.3%.
4. Mainland non-bank customers have returned to the Mainland after obtaining loans in Hong Kong, which is also supported by the official data of China. Statistics from the State Administration of Foreign Exchange show that in 21, the bank's settlement of foreign exchange on behalf of customers was $1,33.4 billion, and the bank's sale of foreign exchange on behalf of customers was $932.7 billion, with a surplus of $397.7 billion. From January to April, 211, the accumulated foreign exchange settlement by banks on behalf of customers was US$ 55.6 billion, and the accumulated foreign exchange sales were US$ 326.8 billion. The accumulated foreign exchange settlement and sales surplus by banks on behalf of customers was US$ 178.8 billion. Most of these dollar surpluses belong to trade, and some of them are loan returns of "domestic insurance and foreign loans".
from the above four points, although it is not enough to quantitatively judge the scale of "domestic insurance and foreign loans", it shows that it is huge.
Profitable
A RMB overseas financing business of "domestic insurance and foreign loans" has brought triple benefits to mainland issuing banks. First, under the circumstances that funds are so tight and the inter-bank deposit war is fierce, the issuing bank obtains a stable fixed-term pledge deposit with an annual interest rate of 3.25% RMB. If the pie falls from the sky, whether it is lending or lending, it will make a steady profit.
Second, the L/C business has brought considerable international business settlement for mainland banks.
thirdly, this business is not restricted by the regulatory indicators of the central bank and the China Banking Regulatory Commission because it conforms to the "RMB cross-border trade business settlement" vigorously promoted by the regulatory authorities.
The reason why enterprises actively raise funds to do more and do this kind of business quickly is because the considerable spread between local and foreign currencies and the exchange difference under the expectation of appreciation provide arbitrage space. At present, the annual interest rate of domestic RMB deposits is 3.25%, while the interest rate of overseas US dollar loans is only 1.8% (LIBOR's annual interest rate was 1.73% on May 3, 211). After one process, it can make a profit of (3.25%-1.73)1.52%, and if the annual appreciation of RMB is 5%, it will be stable at 6.52%.
The author finds that the four interest rate hikes conducted by the Bank of China since 21 for the purpose of fighting inflation have promoted the explosive growth of RMB arbitrage business in Hong Kong's financial market to varying degrees. For example, before October 21, the RMB quota of BOC Hong Kong was only 2 billion yuan (the cross-border RMB settlement in Hong Kong in September was 22.5% lower than that in August). However, in just eight days after the Bank of China announced the interest rate increase, the bank used up 6 billion yuan of RMB quota. On October 27th, 21, BOC Hong Kong, as the clearing bank of RMB cross-border trade in Hong Kong, announced that RMB trade settlement and exchange quota of 8 billion yuan had been exhausted. Since the international financial center city is characterized by the free convertibility of currency and the liberalization of entry and exit, it is not surprising that Hong Kong has become the main battlefield of currency arbitrage.
Accumulated foreign reserves
This kind of overseas financing business, led by mainland enterprises, is not to meet the needs of overseas expansion, but to capture spreads and exchange differences, but to add fuel to the fire for China's increasingly high foreign exchange reserves.
this kind of enterprise has three operation modes to choose from after obtaining foreign currency funds overseas.
first, try to transfer the funds to the mainland for settlement into RMB, and then pledge them to the mainland banks in the form of time deposits to open overseas RMB standby letters of credit for financing, and so on. If it is operated for 1 times, the fund will leverage the same amount of foreign currency to settle foreign exchange with the bank for 9 times, and the commercial bank will resell it to the central bank, so that the central bank's foreign exchange reserve inventory will surge.
Secondly, after the overseas affiliated enterprises obtained this foreign currency loan from the banks in Hong Kong, they used it to pay for the imported goods through formal channels. And use financial derivatives to make profits overseas: after exporting to the mainland, overseas affiliated companies apply for low-interest dollar discount overseas by using RMB creditor's rights receivable from the mainland, especially bank guarantee credit, and sell RMB at NDF (non-deliverable forward) exchange rate to repay US dollar loans at maturity, thus obtaining double arbitrage of exchange rate and interest rate. This kind of loan used to pay for imported goods can also be called "hedging exchange rate risk".
a simpler operation is to obtain RMB after the goods are sold in the mainland, and then transfer them to the mainland bank to open a RMB standby letter of credit, and then raise funds from overseas. This kind of operation is characterized by legality and compliance. Although it takes a long time to sell goods, savvy enterprises can transfer and discount import documents and speed up capital turnover.
although this kind of operation imports goods, it is not necessary to purchase foreign exchange for payment, which is one of the reasons why the central bank has a high surplus in foreign exchange settlement and sale recently.
the third is a mixed operation between the first and the second. That is to say, the return of the issuing company after obtaining funds overseas takes the form of half imported goods and half currency. This kind of operation is relatively hidden and easy to escape supervision, so many foreign trade companies engaged in import and export business do it well.
the above methods lead to the same goal. The chain reaction caused by overseas financing with mainland credit is that foreign exchange accounts for a sharp increase, a large number of base money is passively put in, and inflation remains high.
according to the data released by the central bank, in the first quarter of 211, China's international reserve assets increased by USD 141.2 billion, which continued to maintain the growth trend.
On the other hand, the Hong Kong government said that Hong Kong dollar loans have been growing at a high speed since the beginning of 21, which is higher than the growth rate of Hong Kong dollar deposits. The Hong Kong dollar loan-to-deposit ratio of local banks has increased from 71% in early 21 to 82% in March this year, which is close to the level on the eve of the financial crisis.
potential risks
if the RMB appreciates as expected, the enterprises that pledge to open RMB letters of credit to mainland banks will purchase foreign currency for remittance on schedule at an exchange rate lower than the loan period and return the loans of overseas banks. The overseas bank obtains a loan interest and corresponding settlement fee; The right to use a fixed deposit for mainland banks and related expenses; And the issuing enterprise obtains stable interest spread and exchange difference income, even plus the profit of commodity sales. All three parties are happy.
However, as far as the overall situation of China is concerned, the RMB is not used in the actual settlement under the name of cross-border RMB trade settlement, so that the expected fact that RMB is used to pay for imported goods to push RMB out of overseas has not happened. On the contrary, the influx of overseas (loan) funds into the mainland in the form of imported goods or other channels and forms has increased the liquidity of the mainland and made macro-control more difficult. Recently, two data released by the central bank and the China Banking Regulatory Commission deserve high attention: First, by the end of April 211, the balance of broad money (M2) was 75.73 trillion yuan, up 15.3% year-on-year; Second, by the end of March 211, the total domestic and foreign currency assets of banking financial institutions exceeded 1 trillion yuan, reaching 11.2 trillion yuan, an increase of 18.9% over the same period of last year.
It is worth noting that if the Federal Reserve announces a rate hike, or the RMB depreciates for other reasons, the capital flow will be reversed, and the arbitrage domestic enterprises will lose their profits and give up the RMB funds pledged to banks in the Mainland, and take the foreign currency borrowed from overseas as their own and walk away. As a result, the enterprise gets the appreciated foreign currency, at least not damaged; Mainland banks have not suffered losses after accepting RMB, but what overseas banks hold in their hands is a devalued RMB, and potential risks break out.
At present, although the quantitative easing policy of the Federal Reserve remains unchanged and the zero interest rate level has not changed, some Hong Kong banks have started to raise interest rates on loans, such as Fubon, CITIC International, China Construction Bank Asia and Wing Lung.
Chen Delin, President of the Hong Kong Monetary Authority, wrote on the website of the HKMA on 18 May that although the cycle of tightening monetary policy in the United States has not yet started, and the aggregate balance of Hong Kong's banking system is huge, interbank interest rates will remain weak, but due to the strong demand for loans from different sectors, including related enterprises in the Mainland, bank lending and deposit rates are likely to continue to face upward pressure. In particular, he reminded local banks in Hong Kong who are keen to lend to affiliated enterprises in Hong Kong.
this kind of overseas banks are like the last stick in the above-mentioned arbitrage link, and it is not a long-term solution to passively participate in it. After all, a bank is an enterprise engaged in currency credit. When it is expected that the currency in its hands will be devalued, the selling of this kind of weak currency will begin in the financial market, and the capital flow will reverse. A large number of banks will sell in the interbank market, and the domino effect will be fully displayed.
Lack of supervision
At present, in China's financial management system, the State Administration of Foreign Exchange and its branches and sub-branches are the administrative organs for external guarantees. The foreign guarantee business of domestic financial institutions is supervised by the State Administration of Foreign Exchange, but the State Administration of Foreign Exchange exercises its supervision over financial institutions according to the Regulations of the People's Republic of China on Foreign Exchange Control promulgated by the State Council. However, RMB is a local currency rather than a foreign currency, which makes the State Administration of Foreign Exchange lose the legal basis for managing the financing of RMB prepared letters of credit.
For a long time, the foreign guarantee management of financial institutions in China has been the strength of the State Administration of Foreign Exchange. After all, the internationally freely convertible currencies such as the US dollar were definitely acceptable to overseas institutions in the past, so this business naturally came under the scope of administration by the State Administration of Foreign Exchange according to law. But now the internationalization of the RMB has sprung up, and the RMB has crossed the border.