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Offshore yuan trade expands in Asia
By Nathan Chow |
00:00 UTC+8 February 21, 2013
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Print Edition
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HAVING given Hong Kong a good eight-year head start, China is now turning to other regional partners to launch the next phase of yuan internationalization. Each partner is selected to perform different roles, as explained below.
Singapore: a gateway
On February 8, the People's Bank of China announced that the Singapore unit of Industrial and Commercial Bank of China will become the yuan clearing bank in Singapore. This appointment was widely expected after Beijing indicated a Chinese clearing bank would be designated in the city-state during a top bilateral meeting held last year.
The Singapore Exchange has laid the ground for the listing of yuan-denominated securities. As Asia's second largest foreign-exchange trading center, Singapore houses the treasury centers and off-shore trading operations of many multinational corporations. Once the clearing mechanism is set up, there will be greater transparency in the movement of yuan funds. Market confidence in accepting yuan for trade settlements will increase.
To seize the rapidly growing pie, banks in Singapore began offering yuan banking services a few years ago. As of June 2012, the pool of yuan deposits in Singapore reached 60 billion yuan (US$9.6 billion). The flows in Singapore have been buoyed by the healthy growth of trade and financial linkages with mainland. China, which is Singapore's third-largest trading partner. Total trade between the two countries reached S$104 billion (US$84 billion) in 2012, up 37 percent since the 2008 global crisis. Excluding Chinese mainland and Hong Kong, Singapore currently handles the largest share of yuan payments in Asia.
As the gateway to Southeast Asia, Singapore provides a platform for Beijing to facilitate wider use of the yuan in trade with the Association of Southeast Asian Nations (ASEAN). In 2012, ASEAN exports to China grew to US$195.8 billion from US$22.2 billion in 2000, surpassing Japan to become China's second-largest importing region. China's imports from ASEAN include mainly commodities and raw materials, such as petrol and timber. China's demand for commodities is expected to remain strong.
Taiwan: a local hub
Two days before the Singapore's announcement, financial institutions in Taiwan formally launched their yuan business after signing currency-clearing agreements with the Bank of China's Taipei branch.
Previously, Taiwan's banks were allowed only to undertake yuan transactions through their offshore banking units. The latest development opens up the business to domestic banking, which is 10 times bigger than the offshore counterpart.
Because the yield spread for yuan business is far more attractive than that of the Taiwan dollar, local banks have been aggressively attracting yuan deposits. In the first week after the launch of their yuan business, some banks were offering up to 1.5 percent for demand deposits and 3.5 percent for 3-month time deposits, while others waived service charges for depositing yuan in cash.
We are confident about the initial build-up of yuan liquidity in Taiwan due to strong cross-Strait economic ties. Over the past decade, bilateral trade between Taiwan and the mainland surged fivefold to more than US$160 billion in 2012. The mainland is now the top trading partner of Taiwan and greatly contributes to its trade surplus.
By early 2014, Taiwan's yuan liquidity pool may reach 140 billion yuan, about 2 percent of local deposits.
Due to heavy reliance on manufacturing, Taiwan and Chinese mainland have established a yuan clearing system that will allow Taiwan companies to invoice and settle their mainland trades directly in yuan, eliminating the need to swap from yuan to US dollars before final conversion to Taiwan dollars.
Taiwan's manufacturers will benefit from less exposure to US dollar volatility. They will also benefit from lower transaction costs. Also, Taiwanese enterprises operating in the mainland are now able to repatriate their yuan back to Taiwan. Since a significant share of such monetary transfers were formerly made through unofficial channels due to tight capital controls, the newly established clearing mechanism should bring many of those cross-Strait underground activities to the surface.
Hong Kong: dominant role
Given that the yuan is fungible offshore, the emergence of new offshore centers expands the existing regime instead of creating competing systems.
As such, we do not expect recent developments to have much impact on Hong Kong, especially when the market there is already relatively mature after eight years of development.
Being an important entrepot of mainland trade, Hong Kong is currently handling more than 80 percent of all yuan payments and receiving over 50 percent of all letters of credit sent by mainland banks. As a result, Hong Kong banks are taking the major share of yuan deposit flows from the mainland.
Apart from geographical proximity, Hong Kong also enjoys political support from Beijing. China's 12th Five-Year Plan states clearly that Beijing fully supports Hong Kong's development as an offshore yuan center, highlighting its prominence in the process of yuan internationalization.
Most importantly, China's monetary policymakers want to relax currency controls without creating unforeseen negative consequences. Hong Kong, as a Special Administrative Region of China, serves that goal well.
To provide greater flexibility for Hong Kong banks to manage their yuan exposure, banks' net open positions and statutory liquidity requirements were liberalized several times last year. Since July, Hong Kong banks have been allowed to offer yuan services to non-resident personal customers, and currency conversion is not subject to corresponding limits for Hong Kong residents.
Singapore: a gateway
On February 8, the People's Bank of China announced that the Singapore unit of Industrial and Commercial Bank of China will become the yuan clearing bank in Singapore. This appointment was widely expected after Beijing indicated a Chinese clearing bank would be designated in the city-state during a top bilateral meeting held last year.
The Singapore Exchange has laid the ground for the listing of yuan-denominated securities. As Asia's second largest foreign-exchange trading center, Singapore houses the treasury centers and off-shore trading operations of many multinational corporations. Once the clearing mechanism is set up, there will be greater transparency in the movement of yuan funds. Market confidence in accepting yuan for trade settlements will increase.
To seize the rapidly growing pie, banks in Singapore began offering yuan banking services a few years ago. As of June 2012, the pool of yuan deposits in Singapore reached 60 billion yuan (US$9.6 billion). The flows in Singapore have been buoyed by the healthy growth of trade and financial linkages with mainland. China, which is Singapore's third-largest trading partner. Total trade between the two countries reached S$104 billion (US$84 billion) in 2012, up 37 percent since the 2008 global crisis. Excluding Chinese mainland and Hong Kong, Singapore currently handles the largest share of yuan payments in Asia.
As the gateway to Southeast Asia, Singapore provides a platform for Beijing to facilitate wider use of the yuan in trade with the Association of Southeast Asian Nations (ASEAN). In 2012, ASEAN exports to China grew to US$195.8 billion from US$22.2 billion in 2000, surpassing Japan to become China's second-largest importing region. China's imports from ASEAN include mainly commodities and raw materials, such as petrol and timber. China's demand for commodities is expected to remain strong.
Taiwan: a local hub
Two days before the Singapore's announcement, financial institutions in Taiwan formally launched their yuan business after signing currency-clearing agreements with the Bank of China's Taipei branch.
Previously, Taiwan's banks were allowed only to undertake yuan transactions through their offshore banking units. The latest development opens up the business to domestic banking, which is 10 times bigger than the offshore counterpart.
Because the yield spread for yuan business is far more attractive than that of the Taiwan dollar, local banks have been aggressively attracting yuan deposits. In the first week after the launch of their yuan business, some banks were offering up to 1.5 percent for demand deposits and 3.5 percent for 3-month time deposits, while others waived service charges for depositing yuan in cash.
We are confident about the initial build-up of yuan liquidity in Taiwan due to strong cross-Strait economic ties. Over the past decade, bilateral trade between Taiwan and the mainland surged fivefold to more than US$160 billion in 2012. The mainland is now the top trading partner of Taiwan and greatly contributes to its trade surplus.
By early 2014, Taiwan's yuan liquidity pool may reach 140 billion yuan, about 2 percent of local deposits.
Due to heavy reliance on manufacturing, Taiwan and Chinese mainland have established a yuan clearing system that will allow Taiwan companies to invoice and settle their mainland trades directly in yuan, eliminating the need to swap from yuan to US dollars before final conversion to Taiwan dollars.
Taiwan's manufacturers will benefit from less exposure to US dollar volatility. They will also benefit from lower transaction costs. Also, Taiwanese enterprises operating in the mainland are now able to repatriate their yuan back to Taiwan. Since a significant share of such monetary transfers were formerly made through unofficial channels due to tight capital controls, the newly established clearing mechanism should bring many of those cross-Strait underground activities to the surface.
Hong Kong: dominant role
Given that the yuan is fungible offshore, the emergence of new offshore centers expands the existing regime instead of creating competing systems.
As such, we do not expect recent developments to have much impact on Hong Kong, especially when the market there is already relatively mature after eight years of development.
Being an important entrepot of mainland trade, Hong Kong is currently handling more than 80 percent of all yuan payments and receiving over 50 percent of all letters of credit sent by mainland banks. As a result, Hong Kong banks are taking the major share of yuan deposit flows from the mainland.
Apart from geographical proximity, Hong Kong also enjoys political support from Beijing. China's 12th Five-Year Plan states clearly that Beijing fully supports Hong Kong's development as an offshore yuan center, highlighting its prominence in the process of yuan internationalization.
Most importantly, China's monetary policymakers want to relax currency controls without creating unforeseen negative consequences. Hong Kong, as a Special Administrative Region of China, serves that goal well.
To provide greater flexibility for Hong Kong banks to manage their yuan exposure, banks' net open positions and statutory liquidity requirements were liberalized several times last year. Since July, Hong Kong banks have been allowed to offer yuan services to non-resident personal customers, and currency conversion is not subject to corresponding limits for Hong Kong residents.
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