Financial Market Development in the Process of CNY Internationalization CBRC Shanghai Bureau Guangping (Peter G.) Zhang 张光平 Cash, Payments and Trade Conference at the Asian Banker Summit, Hong Kong, April 8,2011

“Exotic Options – a guide to 2nd generation options”(English,700p) World Scientific www.worldscientific.com 1997,1998 (Peter G. Zhang) 国内汉语版2011年出版 “Chinese Yuan Derivative Products”(English,400p) World Scientific www.worldscientific.com October 2004 (Peter G. Zhang) 张光平著《人民币衍生产品》中国金融出版社(76万字, 876页), 2006年5月首版发行；第二版（114万字，1240页，2008年8月）；第三版（145万字，1500页，2011年中、英文出版；“Chinese Yuan Derivative Products” (In Chinese, 1st Edition 2006, 2nd Edition 2008, 3rd Edition 2011 by Peter G. Zhang) 《国际化趋势下的人民币产品创新》中国金融出版社2009年3月首版发行；相应的英文版2011年1月John Wiley & Sons全球出版发行，日文版和其他语言版2011；第二版2011年6月国内出版，其他语言版2011年出版 (by Peter G. Zhang)。

Major Contents Major Steps of CNY Globalization CNY Settlement of Foreign Trade Comparing with Japan Situation in 1970s Measures of Currency Globalization CNY Globalization in 2010 Forecast CNY Globalization Level in 2020 Financial Market Development in the process of CNY Internationalization Current Market Status Existing Problems and Measures Roles of HK

I、Progress with CNY Globalization CNY businesses formally started in Hong Kong on January 18, 2004 Banks in Hong Kong started CNY deposits and other businesses on February 25, 2004 Banks in Hong Kong could provide CNY credit cards for Hong Kong residents to use in the mainland from April 30, 2004 PBOC declared to expand CNY businesses with clearance in HK on November 1, 2005 PBOC announced that mainland financial institutions can issue CNY denominated financial bonds in HK on January 11,2007年，China Development Bank issued 1st such bonds in HK in June 2007 HSBC and East Asia Bank issued CNY denominated bonds on June 19, 2009 5

Progress with CNY Globalization PBOC signed “Hong Kong CNY Business Settlement Agreement” with Bank of China (HK) on July 19, 2010 and Memo with Hong Kong Monetary Authority on CNY trade settlement, etc. 中国人民银行2010年7月19日与香港人民币业务清算行中国银行（香港）有限公司在香港签署了新修订的《香港银行人民币业务的清算协议》。当日，人民银行还与香港金融管理局就扩大人民币贸易结算的安排，签订了补充合作备忘录 Opening up controls on currency exchange, institutional accounts，etc 修订后的协议放宽了对人民币兑换、机构开户等不涉及跨境资金流动的限制，将可以刺激离岸人民币市场的需求，促进市场供需自我循环 6

II CNY Cross-Border Trade Settlement April 8, 2009, the State Council decided to commerce CNY cross-border trade settlement国务院常务会议正式决定，在上海市和广东省的广州、深圳、珠海、东莞四个城市开展与港澳地区跨境贸易进行人民币结算试点。这是推动人民币成为结算货币的重要步骤 July 1,2009，<Administrative Guidelines for CNY Cross-border Trade Settlement> by PBOC《跨境贸易人民币结算试点管理办法》公布实施，正式揭开了人民币国际化的序幕，标志着人民币在国际化征程中正式迈出了第一步。2009年7月3日，央行发布《跨境贸易人民币结算试点管理办法实施细则》 July 6, 2009, CNY Cross-Border Trade Settlement officially initiated 跨境贸易人民币结算试点启动仪式在上海举行，与此同时，以人民币结算的首单进出口业务也在当日诞生。上海丝绸集团股份有限公司启动首笔人民币跨境贸易计价与结算业务，买方为中业贸易（香港）有限公司，交行为上海丝绸提供了首单人民币跨境汇款结算服务

II Progress with CNY Cross-border Trade Settlement Total Export Import Services & Others Unit: 100 million CNY 2009 35.90 2010Q1 183.50 18.6 181.3 19.5 2010Q2 486.6 46.7 382.6 57.3 2010Q3 1264.8 112 1007 145.8 2010Q4 3128.5 278.2 2465.1 349.3 2010 5063.4 455.5 4036.0 571.9

II Progress with CNY Cross-border Trade Settlement Total Export Import Services & Others Unit: US$ 100m 2009 5.4 2010Q1 26.9 2.7 26.6 2.9 2010Q2 71.3 6.8 56.1 8.4 2010Q3 186.8 16.5 148.7 21.5 2010Q4 468.4 41.7 369.0 52.3 2010 748.0 67.3 596.2 84.5

II Progress with CNY Cross-border Trade Settlement Total Export Import 2010Q1 0.44% 0.09% 0.88% 2010Q2 0.97% 0.18% 1.61% 2010Q3 2.35% 0.38% 4.08% 2010Q4 5.69% 0.94% 9.70% 2010 2.52% 0.43% 4.28% [CNY Settled Import/Total Import]/ [CNY Settled Export/Total Export] 4.28/0.43 = 10!!! Same ratio in Japan 0.3/0.9 = 0.33 in 1970; and 0.9/17.5 = 0.05 in 1975 !?!?!

III Ratios of Japanese Yen Settled Foreign Trades, 1970 to 98 Export to 出口至： Import from 进口自： World世界 USA 美国 EU-欧盟 Southeast Asia 东南亚 EU 欧盟 1970 0.9 - 0.3 1975 17.5 1980 29.4 2.4 1985 39.3 19.7 51.3 47.3 7.3 9.2 27.3 11.5 1987 33.4 15.0 44.0 41.1 10.6 11.6 26.9 19.4 1988 34.3 16.4 43.9 41.2 13.3 10 1989 34.7 42.2 43.5 14.1 10.2 27.7 19.5 1990 37.5 16.2 42.1 48.9 14.6 1991 39.4 16.5 42.0 50.8 15.6 11.2 31.4 21.6 1992 40.1 16.6 40.3 52.3 17.0 13.8 31.7 23.8 1993 39.9 18.0 41.0 52.5 20.9 45.0 25.7 1994 39.7 40.9 49.0 19.2 38.6 23.6 1995 37.6 37.2 44.7 22.7 21.5 44.8 26.2 1996 35.2 15.9 36.1 46.3 20.6 46.1 24.0 1997 35.8 47.0 22.6 22.0 49.3 25.0 1998 36.0 15.7 35.0 48.4 21.8 16.9 44.3 26.7

III Percentage of Japanese Yen of World Allocated Foreign Reserve Currency from 1970 to 2010Q1 　Year 占比 1970 0.0% 1987 6.9% 1999 6.4% 1975 0.5% 1988 7.0% 2000 6.1% 1977 2.5% 1989 7.3% 2001 5.0% 1978 3.3% 1990 8.1% 2002 4.4% 1979 3.6% 1991 8.7% 2003 3.9% 1980 1992 7.7% 2004 3.8% 1981 4.2% 1993 2005 1982 4.7% 1994 7.9% 2006 3.1% 1983 4.9% 1995 6.2% 2007 2.9% 1984 5.7% 1996 5.5% 2008 1985 7.5% 1997 4.8% 2009 3.0% 1986 1998 5.1% 2010

IV、Measuring Internationalization Levels of Currencies Percentage of Reserve Currencies 国际储备货币的占比程度？ Activities in World FX market 国际外汇市场的活跃程度？ Trade Settlement? 贸易结算的比重？ Investment 国际投资的媒介？ International Bonds 国际债券的发行？ International Aides 国际援助的占比？ Risk Management? 外汇风险管理的应用？ Etc.

Compositions of Major World Allocated Reserve Currencies from 2000 to 2010 (Unit: US$ billion） Year 2000 Share 2002 2004 Types of R Total Reserves 1936.3 2408 3748.4 Allocated R 1518.2 100.0% 1796 2655.2 US$ 1079.9 71.1% 1204.7 67.1% 1751 65.9% Euro 277.7 18.3% 427.4 23.8% 658.6 24.8% Pound 41.8 2.8% 50.5 89.5 3.4% Yen 92.1 6.1% 78.1 4.4% 101.8 3.8% SF 4.1 0.3% 7.3 0.4% 4.4 0.2% Others 21.3 1.4% 26.9 1.5% 50.4 1.9% 2006 2008 2010 5251.4 7337.5 9258.2 3315.6 4210.1 5119.7 2171.1 65.5% 2698.4 64.1% 3144.3 61.4% 832 25.1% 1112.3 26.4% 1347.9 26.3% 145.2 168.8 4.0% 202.7 102.1 3.1% 131.9 195 5.7 5.8 0.1% 5.4 56.4 1.7% 96.8 2.3% 224.5

Compositions of World FX Trading by Major Currencies (BIS) Currency/Year 2001 2004 2007 2010 US$ 90.3% 88.7% 85.6% 84.9% Euro 37.6% 37.2% 37.0% 39.1% J Yen 22.7% 20.3% 17.2% 19.0% Pound 13.2% 16.9% 14.9% 12.9% A $ 4.2% 5.5% 6.6% 7.6% SF 6.1% 6.8% 6.4% C$ 4.5% 4.3% 5.3% HK$ 2.3% 1.9% 2.7% 2.4% S krona 2.6% 2.2% N$ 0.6% 1.0% 1.6% SK won 0.8% 1.2% 1.5% Sgp $ 1.1% 1.4% N krone 2.1% 1.3% M peso 0.9% Indian rupee 0.2% 0.3% 0.7% R. rouble 0.4% CNY … 0.1% 0.5% CNY ranked No.20 in 2007 and No.17 in 2010

Currency FX Trading (%) 2007 GDP(%) 2007 FX trading (%)-GDP(%) CNY as a % US$ 43.2% 25.4% 17.8% 169.9% 2.4% Euro 18.5% 27.5% -9.0% 67.3% 6.0% Yen 8.3% 8.1% 0.2% 101.9% 4.0% Pound 7.5% 5.0% 2.5% 150.0% 2.7% S franc 3.4% 0.8% 2.6% 425.0% 0.9% Sum of 5 80.8% 66.8% 14.0% 121.0% 3.3% A$ 1.5% 1.9% 223.3% 1.8% C$ 2.1% -0.3% 87.5% 4.6% Swedish krona 1.4% 0.6% 175.0% 2.3% HK$ 0.4% 1.0% 350.0% 1.2% Norwegian krone 1.1% 0.7% 157.1% NZ$ 0.3% 135.7% 3.0% S$ 216.7% Sum of 7 11.0% 6.4% 171.1% Mexico peso 1.6% -1.0% 37.5% 10.8% SK won -1.3% 30.6% 13.2% SA Rand 0.5% 45.0% 9.0% Danish krone Polish Zloty 0.0% 25.0% 16.1% NT dollar -0.2% 14.3% 28.2% Sum of 6 4.7% -2.1% 56.4% 7.2% R ruble -2.0% 16.7% 24.2% Indian rupee 2.2% -1.9% 15.9% 25.3% Brazilian real -2.2% 48.4% Chinese CNY 6.2% -6.0% 100.0% Sum of 4 -12.0% 9.1% 44.4%

V. Potential CNY Internationalization Level in 2010 From around No.20 in 2010 CNY Internationalization Level should be between No.10 to No.5 by 2020

FX Market Development by 2020 with various levels of CNY Internationalization CNY Ranking 12 10 8 7 6 5 4 3 Chinese Mainland GDP share 18.5% China FX Share/GDP share 7.8% 8.9% 13.1% 28.8% 34.5% 41.2% 69.5% 102.5% Chinese Mainland CNY FX share 1.4% 1.6% 2.4% 5.3% 6.4% 7.6% 12.9% 19.0% Chinese Mainland FX share 2.0% 2.3% 3.4% 7.4% 10.6% 17.9% 26.4% Mainland CNY FX Share in 2020/2010 2.4 2.7 4.0 8.9 10.6 12.7 21.4 31.6 Mainland CNY FX Amount (US$ trillion) 31.9 36.4 53.6 117.8 141.2 168.6 284.4 419.4 Mainland FX Amount (US$ trillion) 44.4 50.6 74.5 163.8 196.2 234.3 395.3 583.0 Mainland CNY FX Avg Annual Growth 10.2% 11.6% 16.0% 25.5% 27.8% 30.1% 37.1% 42.5% Mainland FX Avg Annual Growth 8.4% 9.9% 14.2% 23.5% 25.8% 28.0% 34.9% 40.3%

VI、Current Market Status (FX Fwd) US$ 100 million

VI、Current Market Status (FX Swap) Unit: US$ billion

VI、Current Market Status (Bond forward) Unit: US$ 100 million

VI、Current Market Status (FRA) Unit: US$ million

VI、Current Market Status (IRS) Unit: US$ billion

VII、Problems：Financial Infrastructure enhancement Interest rate liberalization 利率市场化程度和走势，国债收益率曲线的逐步完善及其功能，进步很大，仍需改善 “Real Demand”对交易活跃有相当程度的限制，需要做出与时具进的调整 Rating System Establishment评级机构的建立和逐步完善等 Etc.

Establishing and Improving Market Mechanism OTC Options (FX Options initiated on April 1, 2011,other options still not launched); Financial Futures (Stock Index Futures successfully lunched in April 2010,IR and others still missing); Exchange Traded Options still missing; 场外产品设计、定价缺乏经验厂内参考依据 场内产品缺位，难以对冲风险 期权缺位，风险管理模型缺乏盯市基础 缺乏实战经验的人才

VIII. Roles of HK SAR HK has been playing an extremely important role over the past 3 decades in the opening-up process and it will continue to do so in the process to internationalize CNY HK$ should also has important role to play in the process!

VIII. Roles of HK SAR CNY cross-border trade settlement 77.5% completed through HK in 2010;CNY deposits reached 307.68 billion in January 2011,representing 6.3% of total deposits in HK and 0.51% of total CNY deposits in the mainland; it will grow steadily CNY bonds market developed dramatically in HK in 2010 CNH market relatively well established in HK in 2010

VIII. Role of HK$ HK remained No.6 FX trading center of the world since 1992; its ranking should rise to No.4 and No.3 in the coming 3 to 5 years Despite the higher ranking in FX trading in HK, HK$ has been largely trading in HK, it has remained No.8 currency since 1995 (by share of world FX trading) Promoting the Internationalization of both CNY and HK$ will benefit both HK$ and CNY, and both the SAR and the mainland!!!

VIII. CNY Deposits in HK Feb-11 Jan-11 2010 2011 CNY deposits (100m CNY) 4077.0 3706.8 3149.4 8715.1 HK$/CNY exchange rate 84.386 84.56 85.1 83.0 CNY deposits (HK$m) 483,137 438,366 370,110 1,050012 Share of All deposits in HK 7.0% 6.3% 5.4% 14.8% Share of US$ deposits in HK 23.0% 20.7% 17.6% 50.0% Share Other foreign currency deposits in HK 38.4% 36.1% 32.3% 68.8% Share of Foreign currency deposits in HK 14.4% 13.2% 11.4% 29.3% Share HK$ deposits in HK 13.5% 12.1% 10.2% 30.2%

VIII. CNY Products With so many international financial institutions, experienced professionals, well developed market mechanism，and sufficient CNY pool, HK can provide more and CNY products to the mainland and other financial centers of the world….

Thank You for Your Comments and Suggestions! zhangguangping@cbrc.gov.cn