From Single Hub to Multiple: Renminbi Clearing in Offshore Markets
Over the following five years, the RMB vaulted up the ranks to become the world’s fifth?most used currencyin terms of payments value and the world’s second?most used currency for trade finance according to SWIFT.
In order to accommodate the use of RMB in trade settlement, payments market infrastructures (PMIs) have needed to evolve quickly. The first stage in this evolution was to enable the flow of RMB amongst key offshore markets through a series of offshore clearing arrangements from local real time gross settlement (RTGS) systems in Hong Kong and Taiwan to simple correspondent banking nostro arrangements in Frankfurt, London and other major markets.
We witnessed an expansion of this approach in RMB infrastructures over the following years, transforming from a single hub model with centralised offshore RMB clearing in Hong Kong to a multiple hub model across major financial markets worldwide. By the end of 2014, there were 12 bilateral clearing arrangements between the People’s Bank of China (PBOC) and local central banks, supported by bilateral currency swap arrangements. As the number of markets with an offshore clearing arrangement expanded into key trade corridors, so too did the realisation by corporations that the benefits of denominating trade settlement transactions in RMB were real. They included reducing cost, gaining efficiencies and enhancing access to the China market.
However, the longevity of a multiple hub model is not guaranteed. In fact, as the RMB continues to internationalise through capital account reforms in China, the infrastructure that supports its cross-border flow will continue to evolve. Understanding what the future of RMB clearing could hold first requires a look at the background to prior developments as well as their potential evolution. This article will also highlight some of the key considerations for market participants in relation to using RMB for trade and investments.
The Journey from Single Hub Model to Hub?and?Spoke
The establishment in 2009 of the first offshore hub connecting mainland China’s domestic clearing infrastructure with international PMIs positioned Hong Kong as the testing ground for RMB clearing. With the liquidity created from cross?border trade and a financial market that had enabled RMB deposits to build up since 2002, Hong Kong became the centre for RMB trade settlement, financing and wealth management.
The success of Hong Kong’s experiment paved the way for increasing interest in RMB clearing among other financial centres. In the early stages, some emerging offshore RMB centres focused on optimising existing PMIs linked to Hong Kong. This led to a hub?and?spoke model, where markets such as Taiwan, Singapore and London leveraged Hong Kong’s infrastructure for cross?border payments.
As a result of the significant growth in RMB flows amongst key offshore markets, regulators and market infrastructure providers began to look at how to accommodate this growth by considering a range of options for offshore RMB centres, including:
Multiple Hubs in Asia Pacific, Europe and the Americas
The multiple hub model was adopted in 2013, with RMB clearing centres emerging in Taiwan and Singapore. This new model contributed to a sharp uptick in the use of RMB for intra?Asia trade and investment. In addition, the issuance of RMB?denominated debt instruments and revision of investment quotas (such as the renminbi qualified foreign institutional investor (RQFII)) helped to increase RMB liquidity in offshore markets.
Thereafter, in 2014, eight more offshore RMB clearing centres were established in Frankfurt, London, Paris, Luxembourg, Seoul, Doha, Toronto, and Sydney. These rapid developments have had many positive impacts. For example, they have demonstrated a commitment from key international markets to use the currency for trade and investment and enabled cross?border RMB payments in timezones outside of Asia. At the same time, banks and corporations have gained solid expertise in settling trade and interbank transactions in RMB.
However, there are still operational challenges for market participants who operate in some of these offshore RMB centres, particularly in the areas of RMB nostro account management and liquidity allocation amongst key global markets.
Outlook for Offshore RMB Market Infrastructure
In 2015, we can expect to see continued growth in the offshore RMB market, supported by ongoing policy reforms and an expanded payments market infrastructure. However, with the increasing complexity of correspondent banking networks among offshore RMB clearing centres and concerns about market liquidity fragmentation, market participants may need to work collectively to facilitate increasing adoption of RMB internationally.
For corporations with trade or investments in China, the key consideration is to understand ongoing developments in the currency’s internationalisation as they relate to their day?to?day trade settlement and treasury management. For instance, the nationwide two?way RMB cross?border sweeping policy announced in November 2014 enabled further flexibility for corporations to repatriate funds out of China, thereby helping eligible multinationals to optimise their liquidity, reduce operating and funding costs and gain operational efficiencies through full integration into their cross?border treasury management toolkit. It is also important for corporations to partner with banks that can effectively serve their RMB business needs – not only in Asia but also in other regions.
For banks providing RMB payment services, it will be increasingly important to focus on helping their clients navigate these complexities, provide an efficient and robust payments model connecting to other major payments market infrastructures, and effectively address the changing needs of their own clients’ RMB flows. Financial institutions (FIs) may need to partner with global banks that have a deep understanding of China’s policy developments in terms of the payments landscape, and have the capabilities to serve global payment needs in key offshore markets across all currencies, including RMB.
As a result, corporations and banks need to start formulating long?term strategies for treasury management and nostro account arrangements, which are also in line with ongoing market developments. A ‘wait and see’ approach is no longer an option if market participants want to benefit from the use of RMB in the long term.
Figure 1: Offshore RMB Deposit Balances:
Source: DB Research