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WorldOctober 1 2014

Offshore renminbi clearing centres on the rise

With competition for offshore renminbi business heating up, London and Singapore are both establishing themselves as strong competitors to Hong Kong’s lead, as is the US, which has huge potential for development. 
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Offshore renminbi clearing centres on the rise

The internationalisation of the renminbi is continuing at a rapid pace, and while the value of payments go up year on year, so too do the number of offshore hubs and authorised clearing banks, as well as the number of investment vehicles and instruments offered. Deliverable offshore renminbi volume has grown from virtually zero four years ago to become the largest Asian currency on many trading desks. 

While Hong Kong remains far in the lead as the biggest offshore renminbi payments centre with a 71% market share, London and Singapore are both establishing themselves as strong alternatives. Furthermore, according to Swift’s Renminbi Tracker, Europe now represents 10% of total renminbi payments in value worldwide and is leading adoption beyond Asian countries.

Up and up

Global payments network Swift reports that the UK leads Europe with 123.6% growth between July 2013 and July 2014, followed by Germany (116%), France (43.5%) and Luxembourg (41.9%). Since July 2013, European payments exchanged with China and Hong Kong in renminbi are up 105%, showing a considerable upward trend in renminbi use.

Swift’s Renminbi Tracker, started in November 2011, monitors use of the Chinese currency for payments, trade finance, foreign exchange or securities-related activities. Astrid Thorsen, head of business intelligence solutions at Swift, says that the overall trend has been increased use – in the past three years the renminbi has overtaken more than 20 currencies.

In terms of offshore clearing centres (excluding China and Hong Kong), UK was in first position between June 2012 and February 2014, when it was overtaken again by Singapore.

Within the space of just three weeks, ending July 2014, the People’s Bank of China appointed three new renminbi clearing banks for London (China Construction Bank), Frankfurt (Bank of China) and Seoul (Bank of Communications) in its drive to create a global network of renminbi clearing banks and currency swap agreements, despite delays in the creation of the China International Payments System (CIPS) for cross-border settlement. The three new clearing banks join the existing group of renminbi clearing banks of the Industrial and Commercial Bank of China in Singapore, and the Bank of China for Hong Kong, Macau and Taipei.

European players

Swift’s Ms Thorsen adds that France, Luxembourg, Germany and Switzerland are good examples of the progress made in the past year, with their intentions to play a role in the renminbi industry. France and Luxembourg have memoranda of understanding with the People’s Bank of China as a starting point that is expected to lead to clearing banks. The bilateral currency swap agreement between the People’s Bank of China and the Swiss National Bank signed in July could also put Switzerland in line to become a renminbi hub in Europe.

Ms Thorsen singles out Luxembourg as emerging as a “true offshore centre” in the internationalisation of the renminbi. She says the figures show its use of renminbi is increasing but the weight of flows exchanged directly with China and Hong Kong is relatively low compared with other countries. With Europe’s largest volumes of renminbi-denominated investment funds and dim sum bonds listed on its stock exchange, Luxembourg now hopes to be granted an investment quota under China’s Renminbi Qualified Foreign Institutional Investor programme.

With the percentage of China’s annual foreign trade conducted in renminbi forecast to soar to more than 30% in the next year, Fred DiCocco, Asia-Pacific head of sales and relationship management for BNY Mellon’s treasury services, believes London and Singapore will emerge as the two dominant offshore renminbi hubs alongside Hong Kong by 2020, with Frankfurt and Luxembourg close behind.

He says: “With China-EU trade representing the second largest global economic co-operation pact and with more than 40% of all global foreign exchange trading taking place in London, it was no surprise two years ago to see London take the initiative to position itself as the main offshore trading centre for renminbi.”

Western hub

Certainly London is positioning itself to become the Western hub for the renminbi. Two-thirds of Chinese currency traded outside of China and Hong Kong is already done in London and even prior to China Construction Bank’s official status, banks based in London already had well-established renminbi clearing arrangements in place.

The China Foreign Exchange Trade System has been authorised to launch direct trading between the renminbi and sterling on interbank foreign exchange markets. Following a state visit by the Chinese premier Li Keqiang in June, trade deals worth more than £14bn ($22.84bn) were signed with the UK and the London Stock Exchange said it signed agreements with Bank of China and Agricultural Bank of China to develop UK renminbi trading. Last year, China allowed UK-based investment directly into Chinese stocks. In March this year, the private sector arm of the World Bank, the International Finance Corporation, issued a 1bn-yuan bond in London, the first by an international financial institution.

But, says Thomas Gilles, head of Europe, Middle East and Africa-China group at Baker & McKenzie, nothing is set in stone yet and it is up to the market to decide. The first bonds have been issued in Frankfurt and more financial products are expected when Bank of China’s clearing link is formally implemented in November, replacing the Hong Kong route for Frankfurt. Bank of China will also become a trading and clearing member of the Deutsche Börse. “The market is obviously exploring opportunities and there is a great deal of interest from the market in Germany. The pace is going to increase,” he says.

Singapore shapes up

As the fourth renminbi clearing centre to be authorised, and the first outside greater China, Singapore has already established itself as a clear leader in south-east Asia. In May 2013, HSBC and Standard Chartered became the first banks to issue renminbi-denominated bonds in Singapore followed closely by DBS. Together these banks issued bonds worth a combined amount of Rmb2bn ($325m).

In February this year, Bank of China’s Singapore branch issued a further Rmb3bn of what have become known as Lion City bonds, the largest Chinese yuan bond issuance in Singapore. Listed on the Singapore Exchange, the bonds are cleared through Central Depository, a unit of the Singapore Exchange.

The emergence of Lion City bonds is a significant step for Singapore’s development as an offshore renminbi hub as it allows banks and corporates to access the pool of offshore renminbi in Singapore, instead of having to access the Hong Kong market. This enables Singapore to prove itself as a credible offshore renminbi hub capable of supporting the offering of renminbi products.

American potential

Despite the lack of an appointed clearing bank as yet, the US overtook Taiwan as an offshore centre for renminbi clearing in June this year and currently stands in third place after Singapore and the UK, according to Swift. The value of renminbi payments in the US increased by 327% in the year to April 2014, while their value between the US and China/Hong Kong jumped 229% over the same period.

But despite the increasing use of the renminbi with the US, Swift’s Ms Thorsen says the weight of the renminbi versus the commercial activity between the US and China is still low, indicating there is a huge potential for the US to further adopt the renminbi.  

Demand for renminbi products in the US is growing and in February 2013 the Chicago Mercantile Exchange launched a hedging vehicle in the form of an offshore renminbi futures contract deliverable in Hong Kong, and the exchange began accepting offshore renminbi as collateral for all its futures products in January 2012.

While it is understood Canada is stepping up efforts to become North America’s first renminbi trading hub due to its strengthening commercial relationship with China, some market participants believe a renminbi bank will eventually be established in the US. The main driver will be the volume of trade between the US and China. The US is second to the EU in terms of the value of trade, although the vast majority of trade is still denominated in US dollars.

Clearing bank

In terms of a potential clearing bank similar to the other global financial centres, the five largest Chinese banks are in the process of establishing branches in New York and ramping up development of clearing capabilities to first support their own international branch network but eventually offer settlement services in dollars and renminbi. This could put the renminbi on the international stage but the threat of the Chinese currency to the market share of the dollar is thought to be an underlying reason why the US is in no rush to build a clearing hub.

These significant advances are helping the renminbi become more global in scope, but the implementation of CIPS, China’s international renminbi clearing platform, will be the real game-changer in accelerating the process of internationalising the renminbi and transforming it into a competitive currency against the dollar, euro and sterling.

Originally slated to go live this year, technological and operating policy issues mean it is unlikely that the first batch of payments will go through the system before 2016. While this delay is preventing round-the-clock access to the currency, it does give the Chinese clearing banks and offshore clearing centres more time to work on the foothold they have gained.

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