Frankfurt sets sights on yuan trade as Xi visits Merkel

Frankfurt, Germany's financial capital, is setting its sights on becoming the first city in the euro area to clear and settle renminbi trades, joining global financial centers trying to corner the offshore market.

The Bundesbank and the People's Bank of China will probably sign a memorandum of understanding in Berlin today, when Chinese President Xi Jinping meets German Chancellor Angela Merkel, according to a person familiar with the agreement, who asked not to be identified because the deal isn't public.

China is loosening exchange-rate controls in an overhaul of its $9 trillion economy, sparking a race in Europe to win trade in renminbi, which overtook the euro to become the second-most used currency in global trade finance in October, according to the Society for Worldwide Interbank Financial Telecommunication. Paris, which Xi visited yesterday as part of a European tour, and Luxembourg are also competing to gain the status of offshore trading hub alongside London, Singapore and Taiwan.

"Frankfurt has good chances to become a renminbi trading center in Europe because the European Central Bank is here," said Chen Fei, General Manager of the Frankfurt branch of Industrial & Commercial Bank of China Ltd. "And also because five big Chinese banks have subsidiaries in Frankfurt."

In addition to ICBC, they include Bank of China Ltd., Bank of Communications Co., Agricultural Bank of China Ltd. and China Construction Bank Corp.

The Bundesbank declined to comment on a possible agreement. Two calls to the PBOC's news department went unanswered after regular business hours.

Chinese authorities have yet to name a bank to clear yuan transactions in Frankfurt. A Chinese-German accord would follow the establishment of a 350 billion-yuan ($56 billion) and 45 billion-euro ($62 billion) bilateral swap line between the PBOC and the ECB in October, bolstering access to trade finance in the euro area.

The U.K. Treasury said on March 26 that the Bank of England would sign an initial agreement with the PBOC on March 31 to clear and settle yuan transactions in London.

"You will see several centers, which all will have their own strengths," said Andre LoesekrugPietri, chairman of private equity firm A Capital Group Ltd. in Hong Kong, which advises China's sovereign wealth fund on investments in Europe. "Frankfurt will be linked with the banks and industrial companies behind them. It will be linked to trade. Germany is the economic powerhouse."

China was Germany's thirdbiggest foreign trade partner last year, with 140 billion euros in turnover passing between the two countries, according to the Federal Statistics Office in Wiesbaden. China ranks fifth among importers of German goods and is the second-biggest exporter to Germany.

In a sign of closer economic ties between the two countries, China plans to open a fourth consulate in Germany this weekend in Dusseldorf, according to the city's local chamber of commerce. About 800 Chinese companies have bases in North Rhine-Westphalia, Germany's industrial heartland. More than 300 of those are in Dusseldorf, where about 2,700 Chinese live, according to the city.

German companies including Siemens AG, the country's biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements.

"The potential is vast," said Stefan Harfich, the Siemens Financial Services manager, who steered the introduction of the yuan at the Munichbased company in October. "The introduction of the renminbi as an official company currency will therefore have a big impact on Siemens's business in the coming years."

Daimler AG, the Mercedes manufacturer that sold 235,644 autos in China last year, issued 500 million yuan of one-year notes in Asia's largest economy on March 14, in the first socalled panda bond by an overseas nonfinancial company.

The yuan surpassed the Swiss franc to take seventh place among the world's most-used currencies for payments in January, before slipping back by 0.03 percentage point into eighth place last month, according to Swift. The German government is backing Frankfurt's push for renminbi trade.

"China's economy and its currency have enormous significance for Germany and the euro area," Philipp Murmann, a member of the Bundestag's.