Na­tion looks to boost in­ter­na­tional use of yuan for trade

Clear­ing, set­tle­ment ar­range­ments ex­tend to banks across Europe and Asia, re­ports Jiang Xueqing

China Daily (Canada) - - BUSINESS -

China is strength­en­ing its pol­icy on yuan in­ter­na­tion­al­iza­tion by pro­mot­ing wider use of the cur­rency around the world.

The Peo­ple’s Bank of China signed a me­moran­dum of un­der­stand­ing re­gard­ing yuan clear­ing and set­tle­ment ar­range­ments with the Bank of Korea on July 3, just sev­eral days af­ter it signed sim­i­lar ar­range­ments with the cen­tral banks of Lux­em­bourg and France.

Ear­lier in June, Lon­don and Frank­furt joined Hong Kong, Ma­cao, Tai­wan, Sin­ga­pore and Malaysia in hav­ing des­ig­nated yuan clear­ing banks. The PBOC ap­pointed China Con­struc­tion Bank in Lon­don and Bank of China in Frank­furt.

DeutscheBankstrate­gist Liu Li­nan said in a re­cent re­port, “We be­lieve es­tab­lish­ing yuan clear­ing banks in Europe is another ma­jor pol­icy mile­stone in yuan in­ter­na­tion­al­iza­tion, and with closer eco­nomic and busi­ness co­op­er­a­tion be­tween Europe and China in the years to come, off­shore yuan busi­ness has sig­nif­i­cant growth po­ten­tial in Europe.”

Liu said Europe is likely to be­come the sec­ond-largest off­shore yuan mar­ket fol­low­ing Hong Kong. He ex­pected a broader adop­tion of the yuan in EU-China bi­lat­eral trade and yuan set­tle­ment to triple to 5 per­cent to 6 per­cent of China’s global trade in the next three years.

The Euro­pean Union was China’s largest trad­ing part­ner in 2013, with bi­lat­eral trade ac­count­ing for 13 per­cent of China’s $4.16 tril­lion global trade vol­ume. Although the yuan trade set­tle­ment vol­ume has grown rapidly in re­cent years, the amount of yuan cross-border trade set­tle­ment in Europe ac­counted for less than 1.7 per­cent of China’s global trade as of 2013, ac­cord­ing to the re­port.

The na­tion has taken in­creas­ingly rapid steps to­ward in­ter­na­tion­al­iz­ing its cur­rency since it es­tab­lishedan off­shore yuan mar­ket in 2004

with the launch of per­sonal yuan bank­ing in Hong Kong. In 2010, Hong Kong was de­clared the first off­shore yuan cen­ter.

Dur­ing the past three or four years, the yuan has be­come one of the top cur­ren­cies in trade set­tle­ment. It is now the world’s seventh most-used cur­rency in goods and ser­vices pay­ments, hav­ing climbed from 20th rank in 2013, ac­cord­ing to data from in­ter­na­tional fi­nan­cial com­mu­ni­ca­tions plat­form SWIFT.

It will be­come an in­ter­est­ing cur­rency in in­vest­ment and as a re­serve cur­rency, said Ni­cholas Mackel, CEO of Lux­em­bourg for Fi­nance, a pro­mo­tion agency for the Lux­em­bourg fi­nan­cial sec­tor.

“The in­ter­na­tion­al­iza­tion of the yuan is the sin­gle most im­por­tant mone­tary event from the last decade be­cause it will com­pletely change the in­ter­na­tional mone­tary land­scape,” Mackel said.

Lead­ing Euro­pean fi­nan­cial cen­ters are all woo­ing China to be­come the re­gional cen­ter for off­shore yuan busi­nesses, af­ter China des­ig­nated the first yuan clear­ing bank out­side the coun­try in Sin­ga­pore in 2013.

Mackel said in­ter­est in yuan in­ter­na­tion­al­iza­tion is en­thu­si­as­tic. Ma­jor Euro­pean fi­nan­cial cen­ters, ac­tive in dif­fer­ent fields, are com­pet­ing for the at­ten­tion of the Chi­nese.

Lon­don is strong when it comes to for­eign ex­change and derivatives. Frank­furt and Paris are strong in terms of trade set­tle­ment. Lux­em­bourg’s strengths are in­vest­ment funds, bonds, de­posits and loans.

“For the Chi­nese, we are com­ple­men­tary be­cause each of us of­fers China our tra­di­tional strength and can of­fer a dif­fer­ent chan­nel to in­ter­na­tion­al­ize its cur­rency,” Mackel said.

Clif­ford Lee, head of fixed in­come at Sin­ga­pore-based DBS Group Hold­ings Ltd, said: “So far the reg­u­la­tors in China seem to like the multi-clear­ing cen­ter sit­u­a­tion. Be­cause they like what they see, they’re go­ing to con­tinue to roll out (more off­shore yuan clear­ing banks). In the im­me­di­ate fu­ture, you’ll see that trend.

“Once a cer­tain amount of flow is es­tab­lished out­side China, it’s very pos­si­ble that they will start to con­sol­i­date,” Lee said.

The reg­u­la­tors have wisely taken mea­sured steps, look­ing at the re­ac­tion and the devel­op­ment be­fore go­ing the next step, Lee said.

He said it is the fun­da­men­tal use of the yuan that is go­ing to drive the off­shore yuan mar­ket.

“The more youmake the yuan rel­e­vant in terms of ap­pli­ca­tion, the faster the mar­ket will de­velop,” he said.

Yuan in­ter­na­tion­al­iza­tion has con­tin­ued to grow in re­cent years on the back of strong pol­icy sup­port by the govern­ment and the cre­ation of ad­di­tional off­shore yuan clear­ing ar­range­ments and cur­rency swap lines with over­seas cen­tral banks.

The lack of off­shore in­vest­ment op­tions has con­tin­ued to drive the huge de­mand for yuan bonds.

As of June 26, to­tal off­shore yuan bond is­suances had reached 276.2 bil­lion yuan ($44.5 bil­lion), com­pared with 280 bil­lion yuan for the whole year 2013.

Lee es­ti­mated that off­shore yuan is­suance is likely to re­main buoy­ant in the sec­ond half of 2014 and be­yond.

In ad­di­tion to in­creased is­suance vol­ume, more in­ter­na­tional is­suers have tapped into the off­shore yuan mar­ket, although Hong Kong is­suers con­tinue to form the bulk of the mar­ket.

Non-Asian cor­po­rates had is­sued 16 bil­lion yuan worth of off­shore yuan bonds by June 26, com­pared with 27.9 bil­lion yuan last year, Lee said.

The Peo­ple’s Bank of China is pre­par­ing to launch the China In­ter­na­tional Pay­ments Sys­tem to re­place a patch­work of net­works and al­low has­sle-free yuan pay­ments.

By de­vel­op­ing and re­search­ing CIPS, China is build­ing an ex­press­way for the yuan to be­come fully con­vert­ible on the cap­i­tal ac­count.

The sys­tem is an in­fra­struc­ture for the cross-border use of the yuan and will have a deep im­pact on the in­ter­na­tion­al­iza­tion of the cur­rency, said Li Bo, head of the Mone­tary Pol­icy De­part­ment II of the PBOC. Con­tact the writer at jiangx­ue­qing@chi­

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