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Thursday, 18 July 2019

Hub rivalry

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The competition between the world’s financial centres to establish their offshore renminbi trading credentials has emerged as one of the most visible signs of the currency’s internationalisation.

PRC regulators have stoked that rivalry in recent months with approvals for an increasing number of international renminbi-clearing banks, key components in China’s steady push to widen the use of its currency.

Since mid-June, the People’s Bank of China has approved renminbi-clearing banks in London, Frankfurt and Seoul, and signed memos of understanding with Paris and Luxembourg, which are expected to lead to the creation of clearing banks in those cities. The Reserve Bank of Australia said in July it was also in the process of preparing a memo of understanding for a clearing bank in Sydney. There already are clearing banks in Hong Kong, Macau, Taipei and Singapore.

The frenetic pace at which these hubs are being set up reflects the financial stakes involved in making it easier for companies and banks to do business in renminbi in major financial centres across the globe.

“It goes in two ways – the Chinese Government wants to expand the usage [of the renminbi], as a result of the economic and trade activities, and foreign countries see this as an opportunity to boost financial services in their own countries,” said Jimmy Leung, banking and capital markets leader for China at PwC, which did a comparative study of cross-border renminbi centres in February titled “Where do you Renminbi?”

Trade settlement in renminbi is clearly on the rise as more Chinese corporations seek to settle accounts in their own currency, “and, because [China’s] rates are higher than the rest of the world, they can offer a discount for settling in RMB,” said Andrew Seaman, portfolio manager of the Renminbi Bond Fund at Stratton Street Capital.

The recent MoU between the PBoC and Banque de France to set up a clearing bank in Paris is leading to more inquiries into how the renminbi can facilitate trade between China and French companies, said Julien Martin, Hong Kong-based head of BNP Paribas’ RMB Competence Centre.

“The growth potential for RMB is still fantastic, and the overall volume whether it is in Asia or in Europe can be expected to grow exponentially,” Martin said. “We see more

and more customers asking for renminbi, in Paris, for example, and this is a significant advantage of offshore centres – creating a buzz and encouraging conversation about the currency.”

There are intangible benefits of spreading familiarity with the renminbi across the globe, where individuals in far-flung cities can conduct transactions in the currency in their own language and in the same time zone. It makes it easier to roll out innovations or for traders to talk to one another, said Ashley Davies, senior economist and strategist at Commerzbank in Singapore.

“Having the confidence that liquidity will be available in times of crisis is also an important consideration,” Davies said.

Most financial centres are expected to have some renminbi capabilities in the years ahead, but each will likely have their speciality. Hong Kong will remain one of the most important centres because of its geographical proximity to China, PwC’s Leung said, but the city with the potential to win the race for the biggest offshore trading centre – and it is often described as a race – is London.

“When you talk about being a successful currency centre, you need to have flows of funds in and out,” Leung said. “The volume in and out London is bigger than other cities you can name.”

To see the digital version of this report, please click here.

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