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Yuan itinerary adds Frankfurt, London and Seoul
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THE yuan’s recent depreciation has not slowed efforts by Chinese monetary authorities to pursue the internationalization of the currency by building a global yuan-trading network.
In one of a recent series of progressive steps, the People’s Bank of China appointed new yuan-clearing banks in three financial centers: China Construction Bank for London, the Bank of China for Frankfurt and the Bank of Communications for Seoul. The centers will facilitate offshore yuan transactions.
Yuan-clearing banks are different from commercial banks. They typically have strong yuan assets and supply yuan liquidity to the market with their own capital.
“China is accelerating the construction of a global network for the yuan,” said Terence Chiu, managing director and China head of commercial banking at HSBC China, “Improving infrastructure in Europe and South Korea will help lift yuan business to a new level.”
In other actions, the central bank granted 80 billion yuan (US$12.9 billion) in investment quotas to both Frankfurt and Seoul under the Renminbi Qualified Foreign Institutional Investment program. That will expand foreign access to China’s domestic capital market.
It also announced the start of direct trading of the yuan against the British pound and the Korean won. Those channels will eliminate the need to use of the US dollar as an exchange intermediary when converting the currencies.
The recent moves came amid several high-level meetings between Chinese and foreign leaders, including a visit to South Korea by President Xi Jinping, a visit to Europe by Premier Li Keqiang and a visit to China by German Chancellor Angela Merkel.
Global awareness
Anointing clearing banks offshore is considered one of the most effective steps in boosting global awareness and confidence in the Chinese currency, though there has been some debate about the efficacy of these banks in expanding liquidity.
Before the three new clearing banks were announced, financial institutions had to meet their demand for yuan through representative banks, usually in Hong Kong. To some financial experts, the system worked quite well. “London is the biggest US dollar settlement market for offshore transactions, and it doesn’t have a clearing bank for US dollars,” Karen Fawcett, group head of transaction banking at Standard Chartered Bank, told Shanghai Daily last August. “So if it can do without one for the US dollar, why not also for the yuan?”
Reservations aside, economists generally lauded the new clearing banks in Europe as a “milestone.”
Liu Linan, strategist with Deutsche Bank, said dedicated clearing banks in London and Frankfurt are critical in facilitating cross-border yuan trade and investment settlement in European, Middle Eastern, African and American time zones.
The clearing banks also will be able to offer market-based interest rates for yuan deposits, similar to the situation now in Hong Kong and Singapore.
“Offshore yuan markets in London and in Frankfurt will focus on different products and services, driven by the fundamental demand in each market,” Liu said. “We think the market in London will primarily focus on institutional investment demand, while the Frankfurt market will focus on corporate demand.”
In the case of South Korea, China’s third-largest trading partner, the clearing bank there will extend the coverage offshore yuan trading in Northeast Asia, the Korean branch of the Bank of Communications said.
The bank has signed a memorandum of understanding with institutions, including Korean Securities Exchange, Woori Bank, and firms including SK Networks and Hyundai Steel.
It will deepen economic links and financial ties between China and Korea, the Chinese bank said in a statement.
There’s no denying that demand for the yuan as a trade settlement currency is on the rise.
An HSBC annual yuan survey released last week said 40 percent of Taiwan respondents and a quarter of those from Germany and France said they are using the yuan to settle trade, with both percentages rising from last year. The survey is based on responses from 1,304 businesses linked to commerce on the mainland.
German companies led the way, with the percentage of respondents reporting yuan usage jumping to 23 percent from 9 percent last year. Usage in Hong Kong rose to 58 percent from 50 percent, while in the US, the figures climbed to 17 percent from 9 percent.
Straight benefits
Recent data from SWIFT, a global financial transaction information network, showed the yuan holding its position as the seventh most used currency, accounting for 1.47 percent of global payments. That was up from 1.43 percent in April.
The global expansion of clearing banks benefits Chinese banks in a more straightforward way beyond the political motivations of authorities.
Clearing banks will continue to be an essential component of cross-border yuan transactions before the currency is made fully convertible. Such a role generates income and expands business opportunities for Chinese banks eager to expand overseas as growth at home slows.
In addition, banks can provide ancillary services, such as capital management, for foreign clients.
Small wonder that China’s biggest banks have sought status as regional clearing banks. So far, Agricultural Bank of China is the only one of the “Big Five” banks remaining out of the clearing network.
Prior to the three newest clearing banks, Bank of China was designated as the yuan-clearing bank for Hong Kong, Macau, Taiwan and Malaysia, while Industrial and Commercial Bank of China served that role in Singapore. More clearing banks are expected to be appointed following agreements between China and Australia, France and Luxembourg.
“Setting up clearing banks is a natural progression in China’s merging with the international economy,” said Hu Zheyi, vice president of China Construction Bank. “Offering yuan clearing services will eventually lead to pricing advantages for domestic companies.”
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