While Hong Kong remains the most important offshore RMB hub, there is now competition from five in Europe: Germany, the UK, Luxembourg, France and, most recently, Switzerland, while Thailand, Malaysia and Canada have been announced as future RMB hubs. The markets have broadly adopted the currency in financial and capital markets transactions, with the UK and French governments successfully issued their own RMB-denominated bonds. The RMB is now a top five global currency by value, according to
the latest RMB tracker
published by SWIFT, surpassing the Canadian and Australian dollars (CAD/AUD).
The Chinese currency’s adoption in commercial flows for goods and services also continues its strong momentum. Initial pilots with intercompany flows are already expanding to third-party payments and collections in RMB. There are clear financial and operational advantages for onshore parties, from reduced hedging and transaction costs, simpler documentation requirements and faster payment cycle times. Commercial discounts are becoming the norm for settlements in RMB, according to market sources. Entire industry sectors transacting in foreign currency with China could benefit by redenominating flows in RMB.
RMB hubs serve as a conduit for transactions between counterparties onshore and offshore, for both commercial trade and financial purposes. Hong Kong has maintained its competitive edge with the largest pool of liquidity from retail and wholesale RMB deposits and financial products in RMB. Initiatives such as extended clearing hours for the real-time gross settlement (RTGS) system in Hong Kong to cover business hours in Europe and North America, and the Hong Kong–Shanghai stock connect, denominated in RMB, will support continuing growth in value and volume of RMB transactions.
Some of the hubs will play a role in facilitating specific RMB flows in their respective markets. The RMB leg of foreign exchange (FX) flows in London may be convenient to settle through that city’s hub, if London’s financial community fully supports it and participates. Likewise, the flows through the Luxembourg hub might be highly correlated to the investment funds business.
The challenge for China is the RMB user experience. While economic considerations will be the main drivers, the RMB also needs to be as user-friendly as other currencies for adoption to continue. Provided that simple and clear payment instructions can be exchanged, processing timeframes and value-dates are defined and respected, the risk factors are clear, and transactions costs are minimised, adoption of the RMB should continue.
Complexities and Risks
The proliferation of hubs, and with it the number of RMB offshore and correspondent banking accounts, adds complexity and risk to payment processing for buyers, sellers and also their banks. Determining the appropriate routing instructions for payments requires discussions between parties to exchange information and consultations with their respective banks. To effect a payment to mainland China, the beneficiary must provide the routing instructions for the payment from its bank.
Each bank may route payments differently, depending on its own operational processes or liquidity needs. Additional information as to the purpose of the payment, the supporting documentation requirements, if any, and whether the beneficiary name needs to be in Chinese characters should be confirmed. Where the transaction is between two offshore counterparties, the payment instructions may require special formatting to facilitate communication and straight-through processing (STP). This manual processing effort can be supported for low volume, high value transactions, but is unsustainable given the expected growth in RMB payments. For banks, maintaining multiple foreign correspondent accounts in different hubs only exacerbates the liquidity issues when they receive RMB in different locations from their outbound payment flows.
The common comparison is the easy-to-use US dollar (USD) thanks to the Clearing House Interbank Payments System (CHIPS). Its published correspondent bank network and clear, transparent routing instructions facilitate STP for banks and multinational corporations (MNCs). USD payments take minutes to process via CHIPS regardless of the location of the paying and receiving parties, but there is no such certainty for RMB flowing through the hubs due as much to the routing complexity and manual processing as well as the liquidity issues.
There is great anticipation from all parties for the China International Payments System (CIPS), which is expected to streamline the current process for global payments denominated in RMB by connecting to the China National Advanced Payment System (CNAPS) domestic payments infrastructure platform. It is likely to reduce the flows through all but the largest hubs. The launch date for CIPS has still to be confirmed, but People’s Bank of China (PBOC) and other Chinese banks are working diligently to upgrade CNAPS and simplify and standardise routing instructions. The RMB needs operational efficiency as part of its global march towards internationalisation.
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