Renminbi Internationalisation: Moving Beyond Hong Kong
Looking back over the past year it is clear that the value of cross-border Chinese yuan payments – hereafter known as renminbi (RMB) – has continued to increase at an impressive pace.
Trade redenomination is still the major driver of this cross-border payment growth. Last year the cross-border use of RMB payments propelled the currency to 14th position in SWIFT’s world payments currency rankings, moving it up six positions past important regional currencies such as the New Zealand dollar (NZD). There were also increases of 12% in the number of countries and 27% in the number of financial institutions (FI) involved in cross-border RMB payments compared with 2011.
Last year was full of milestones for the RMB that made this continued upward momentum possible. They included public comments from multinational corporates (MNCs) such as IKEA on their use of RMB; market infrastructures launching new RMB-denominated products (CME Group’s launch of offshore RMB futures in February being a very recent example); developments in Taiwan* and further RMB bilateral swap agreements being discussed; all of which offered a boost in confidence for further momentum for the currency.
So far in 2013, we have already seen indications to create the expectation that there will be further capital account liberalisation which, combined with market forces, will continue to create an environment for increasing cross-border usage of the currency. SWIFT expects to see cross-border RMB payments to increase in value by 15%. This could mean that by the start of 2014, approximately 15% of China’s global trade will be transacted in RMB.
Despite the advantages of developing Hong Kong as an offshore RMB centre under the ‘One Country, Two Systems’ policy, other regions are also expanding their RMB business. RMB cross-border clearing currently consists of either going through the designated RMB clearing bank or making the payment directly to an RMB agent bank in China. The choice between these two is typically based on the client’s preference as to the scope of usage for the accounts, the return on investment/deposit and the complexity of account-opening processes.
Ten Years of Growth: HK, Taiwan and Singapore
In Hong Kong, the first clearing bank was established in 2003 when Bank of China Hong Kong (BOC HK) was appointed by the People’s Bank of China (PBoC) as the clearing bank for offshore RMB. BOC HK acts as the central clearing hub for processing the majority of the world’s offshore RMB transactions, with London, Singapore, Taiwan and other major financial centres all leveraging this common clearing system.
The RMB real-time gross settlement (RTGS) established by the Hong Kong Monetary Authority (HKMA) and Hong Kong Interbank Clearing Limited (HKICL) provides the infrastructure to support the Hong Kong hub. As of 27 August 2012, there were 168 participants; 128 with a presence in Hong Kong and 40 overseas direct participants. All of these participants have opened a settlement account with the RMB Clearing Bank. Key advantages of the Hong Kong infrastructure for RMB clearing are the long operating hours, cross-border collateral management service and payment-vs.-payment facility which helps with the reduction in counterparty risk associated with RMB.
The current RMB clearing model, with Hong Kong as the main offshore RMB hub, has supported development of the cross-border use of RMB. In 2012, BOC Taipei was announced as the RMB clearing bank for Taiwan and Industrial and Commercial Bank of China Singapore (ICBC SG) in 2013 for SG RMB clearing. Since the local RMB business and RMB clearing bank was announced last December, Taiwan volumes have increased significantly.
Singapore also has the potential to play an important role in RMB clearing. The island city-state could provide a platform for China to facilitate a wider use of RMB in the China-Association of South East Asian Nations (ASEAN) trade. ASEAN is an important trading partner with China and with the increase in intra-Asia trade this payment corridor should continue to grow in significance in the future. It is Asia’s second-largest foreign exchange (FX) trading centre after Japan and as a result Singapore has many MNC regional treasury centres as well as offshore trading operations. Last month the PBoC doubled its FX swap line with Singapore to yuan renminbi (CNY) 300bn. This makes Singapore the third-largest counterparty after Hong Kong (CNY400bn) and Korea (CNY350bn) out of the 18 countries with these swap lines. The swap line should improve confidence related to RMB in Singapore.
Priorities and Future International Developments
With the emergence of Taiwan and Singapore as offshore clearing centres, many in the industry are asking what the future of clearing might look like for the RMB. If we take US dollar (USD) clearing as an example, there are many countries in the Asia Pacific region that clear USD for domestic or regional interests, such as Hong Kong, India, Japan, Malaysia and the Philippines. According to a Federal Reserve survey in 2012, the top factors that influence the routing path decision for payments in markets that have domestic clearing of USD include:
Surprisingly low on the list are items such as access to liquidity, more robust information reporting and more transparent prices. Since the top reason cited for USD clearing in-country was ‘quicker processing’ the Federal Reserve also asked the significance of potential delays and the top three identified were:
If we take some learnings from the USD, excluding compliance delays, we can consider that the management of credit and liquidity could provide two benefits. Can we also apply this to RMB? If we again draw from the USD example, we have Fedwire (formerly the Federal Reserve Wire Network), Clearing House Interbank Payments System (CHIPS) and local clearing of USD around the world including Asia. The proliferation of USD clearing systems is not viewed as a positive development by the global transaction banks. However, this has been the path of development for the clearing of USD offshore due to local requirements and/or perceptions. Will we see the same development path for RMB clearing?
When thinking about the development of infrastructure in other clearing centres, important things to consider would be the business case for infrastructure development, the local drivers and the long-term expectation of a global clearing system with the historical perspective of what happened, for example, with the USD.
* Since July 2011 the Taiwan Financial Supervisory Commission (FSC) has permitted designated domestic banking units to undertake RMB foreign currency businesses, including deposit, loan, remittance, trade settlement and wealth management products. PBoC selected BoC Taipei as the clearing bank for RMB business in Taiwan. Taiwan banks’ RMB deposits quickly reached record highs thereafter.