Global Renminbi Hubs: the Competition Heats Up

These deposits and transactions have propelled the RMB to the position the second most-used global currency in trade financing, while it has overtaken both the Australian and Canadian dollars (AUD/CAD) to become fifth in payments behind the Japanese yen (JPY), and reach ninth position in forex trading.

Looking back, the history of currency developments has shown the growth of the offshore market to be an indispensable factor in the internationalisation of a currency, with today’s widespread usage of the US dollar (USD) attributable to the rapid expansion of the USD market in Europe during the 1960s and 1970s. At present, with China’s capital account yet to be fully liberalised, the development of the offshore market takes on even greater significance in driving the internationalisation of the RMB. As regards the offshore RMB capital pool, recent statistics from June 2014 indicate that RMB offshore deposits have exceeded the scale of RMB1.7 trillion.

As a whole, RMB internationalisation and the facilities of offshore centres are mutual drivers – cross-border use of the RMB encourages the formation and development of offshore centres, while offshore centres encourage RMB flows and raise the currency’s standing. According to the latest People’s Bank of China (PBOC) statistics, RMB cross-border trade settlement reached RMB5.9 trillion in 2014, marking a 42.6% year-on-year (YoY) increase. This represents 22.3% of China’s trading volume in both imports and exports, an increase of 20 percentage points from the 2010 figure of 3%.

At the same time, the rapid development of offshore RMB centres has been facilitated by the PBOC’s designation of eight overseas locations: London, Frankfurt, Seoul, Paris, Luxembourg, Doha, Sydney, Toronto and Bangkok as hubs of RMB clearing services. The network of RMB clearing services is thus expanding from Asia towards Europe, Australia and the Americas, forming a solid foundation for the RMB’s eventual status as a global currency that can be cleared round-the-clock.

Simultaneously, the respective offshore centres have also been refining their RMB financial products and services. Cases in point are the UK’s successful launch of RMB-denominated bonds to be used for addition to its foreign exchange (FX) reserves; and Singapore’s launch of RMB futures contracts.

Figure 1: Top 10 RMB Payments Centres (excluding Hong Kong and the mainland)
ICBC Fig 1 Top 10 RMB Payments Centres

At present, Hong Kong remains the largest RMB offshore centre; however, markets such as Singapore, London and Taiwan are also seeing rapid development. RMB internationalisation will bring to international financial centres new opportunities and business, and the relations between these financial centres should not be exaggerated as a ‘zero-sum game’ – there is an objective basis with benefits for cooperation by each party.

The Singapore and Taiwan markets serve as prime examples. Taiwan is growing faster on the RMB deposits front, while Singapore’s advantage in currency transactions and trade settlement has been outstanding; both reflect the fierce growth of RMB settlement volumes. The mutual compensation capabilities of each offshore centre far exceeds the competition between them; it is important to strengthen their relations and cooperation, and to showcase their individual unique strengths, in the course of developing and promoting RMB products. It is for this reason that ICBC Singapore adopted a dual-listing approach in its launch of the ‘Lion City’ bonds (Lion City being a popular name for Singapore, derived from the original Malay) of RMB4bn with tranches in both Singapore and Taiwan.

Alternatively however, each RMB offshore centre faces the issue of market liquidity. With the expansion of the offshore RMB markets, expectations regarding market liquidity are increasing. This causes competition between the hubs, with Hong Kong´s global market share having declined from 85.1% at the end of 2012 to 71% in June 2014 due to increased options elsewhere for businesses, and London being overtaken by Singapore in February 2014 in its RMB trading volume, as per Figure 2 below.

Of course, London, with its 62% of RMB-denominated trade payments between Asia and Europe, will remain an important RMB clearing centre between Asia and Europe in the years ahead, but the rapid rise of Singapore indicates the city state is playing an increasing role. To put it into context, in 2013 there was RMB3.5 trillion clearing within Singapore´s borders; a figure that had rocketed 1300% to total of RMB40 trillion at end-2014.

Figure 2: Singapore and London’s Growth as RMB Payments Centres
ICNC Fig 2 Singapore vs London as RMB Payment Centres

Hence, amid positive competition amongst RMB offshore centres, there should be a strengthening of mutual relations and cooperation, which would combine the unique advantages and capabilities of the markets to expand RMB products and innovation. There will be two important factors affecting RMB trading over the next few months:

  • Firstly, there is the upcoming International Monetary Fund (IMF) decision this year about whether to include the RMB in the basket of currencies determining the value of the special drawing rights (SDRs), created by the Fund in 1969 as an international reserve asset. Global RMB volume will continue to increase over 2015: therefore if RMB is included in SDR assets, all central banks will become holders of RMB exposure and the recognition of RMB´s reserve currency status will boost clearing worldwide in each hub.
  • Secondly, in recent times we have seen the RMB slightly devalued against the US dollar (USD). However, compared to the euro (EUR) and the yen (JPY), it has appreciated and the currency’s value is relatively stable in the long term.

The latest SWIFT tracker shows 50 countries out of 161 already using the RMB for more than 10% of their payments value with China, showing that it will be a currency to be reckoned with going forward. Subsequently, the RMB can maintain a continued and stronger presence in offshore markets, creating a self-sustaining mechanism for RMB internationalisation worldwide.


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