Two cities become clearing houses

Updated: 2014-06-27 07:33

By Cecily Liu and Zhang Chunyan (China Daily Europe)

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Two cities become clearing houses

China Construction Bank signed agreements with 11 major banks in London on June 19, as it became London's official yuan clearing bank. Provided to China Daily

Agreements will allow investors to reduce overseas renminbi payment risk and make trading in currency more efficient

The central banks of Germany and Britain have appointed two major Chinese banks as the first to offer yuan currency clearing in London and Frankfurt.

Bank of China's Frankfurt branch has been cleared to facilitate transactions in the Chinese currency, making Germany's financial capital the first hub for such payments in the eurozone.

China Construction Bank, China's second-largest lender, has been selected as the first clearing service for yuan trading in the British capital.

Both announcements were made during the Chinese Premier Li Keqiang's visit to Europe.

Clearing banks facilitate and support offshore renminbi transactions, through direct cooperation with China's central bank, the People's Bank of China.

They allow free and efficient cross-border flow of the renminbi, which is normally restricted because the yuan is still a controlled currency.

Previously Europe had no yuan clearing banks.

Janet Ming, head of the British bank RBS's China desk in London, says the designation of the two clearing banks is a key step in completing the yuan's international infrastructure, in two highly influential offshore hubs.

"The change will allow investors to cut the risk from making overseas payments in renminbi and should make trading in the currency more efficient and liquid," she says.

"It may also attract Chinese companies keen to invest in Europe as well as making it easier for investors to gain access to China's onshore capital markets."

Previously in London, much of the yuan clearing activities were completed through Bank of China in Hong Kong.

Ming says the new London clearing agreement will complement the clearing infrastructure in Hong Kong and ease the transfer time of funds for businesses operating in Europe and the US.

"London's role may become more important as the focus shifts towards developing yuan-denominated products for investors."

Andrew Carmichael, a partner in the London-headquartered law firm Linklaters, saysfor London to have a yuan clearing bank will allow clearing to be carried out in the same time zone and from a technical point of view is easier to use.

Without an official clearing bank, clearing activities can still be completed by internal cooperation between individual banks or by use of other clearing systems such as the Hong Kong one, but such channels would require more work, timing differences and remoteness from the banks that provide this service, he says.

Britain and China signed a memorandum of understanding last month to set the service up, days after Germany clinched a similar deal for Franfurt.

Ming says both the appointments of the yuan clearing banks underlines just how determined the Chinese government is to accelerate the internationalization of the yuan to "a new level", and of the British and German governments' commitment to support the process and to compete for more trade with, and FDI from, China.

Zhou Xiaoming, minister counselor for the economic and commercial office at the Chinese embassy in London, says internationalization of the yuan is strategically key to China's economic growth.

"Because China is becoming an international economic superpower, it is important that the international use of its currency reflects this," he says.

The US dollar is now the world's dominant international currency, and accounts for a large portion of China's foreign currency reserves.

"The global dominance of the US currency means China has had to keep a high level of dollar currency reserves," Zhou says. "This puts it in a difficult position, because its US dollar reserves will gradually decrease in value as the US government carries out its program of quantitative easing."

But the situation can be changed, he says, if the yuan becomes a more important currency internationally, reducing the dollar dominance.

China's push to internationalize its currency started in 2008, when the global financial crisis highlighted the danger of over-reliance on the greenback.

During that year's G20 summit in Washington, former Chinese president Hu Jintao called for "a new international financial order that is fair, just, inclusive and orderly".

Soon after, Beijing began to encourage use of its currency in international trade, swap arrangements among central banks, and bank deposits and bond issuances in Hong Kong and other offshore financial centers.

But without an official clearing channel, the flows between offshore and onshore yuan have been problematic, highlighting the importance of establishing offshore yuan clearing bank arrangements.

China Construction Bank has signed agreements with 11 other major houses in London that will be using its clearing channels for their yuan activities, including Standard Chartered, Deutsche Bank, Wells Fargo, J.P Morgan, ICBC and Bank of China.

The clearing service provided by CCB will run 24 hours, in conjunction with PBOC as well as CCB's global network.

Wang Hongzhang, chairman of CCB, says it will endeavor to provide a prompt, secure and efficient yuan clearing service that satisfies the needs of other banks in London.

As a subsidiary, CCB in London has now set up a direct guarantee arrangement with CCB headquarters allowing it the financial capacity to accommodate the new clearing role.

The chairman says CCB has already submitted an application for the granting of branch licenses with the UK regulators, which would allow it to offer more flexible lending and financing capabilities.

Wang says CCB plans to build its yuan activities in four stages: extending its London clearing services into Europe and other regions; increasing the amount and diversity of its offshore yuan product offering, including options, interest rate and currency swaps; issuing another yuan bond in London in the foreseeable future; and establishing a platform of yuan activities across its international network.

Some London banks, such as Standard Chartered with Agricultural Bank of China, have their own clearing platforms set up, and Wang says CCB's new platform will act as a complement to existing clearing channels in the city.

The signing of agreements between CCB and the 11 major banks is an indication of their trust in CCB to provide the service, he says.

"We will play a key role in facilitating yuan clearing in London. Our hope is that different banks will work with each other."

As well as the provision of clearing, PBOC has also guaranteed liquidity support for CCB's yuan activities in London, but with 6 trillion yuan in assets, considerably larger than the city's total yuan activities, he says. He is "confident we can provide sufficient liquidity support".

Globally, use of yuan in all international trade finance grew to 8.66 percent last October, from just 1.89 percent in January 2012, according to Society for Worldwide Interbank Financial Telecommunication figures, making it the second most used currency for trade finance internationally after the US dollar, which accounted for 81.08 percent.

About 18 percent of China's global trade is now denominated in yuan, compared with less than 1 percent nearly four years ago.

Ming says the increasing use of yuan in European financial hubs will help the currency gain popularity in the West.

"Competition has always been the key driver for innovation and growth," he says, "and it is competition among European financial centers what will help to accelerate the renminbi's internationalization process."

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(China Daily European Weekly 06/27/2014 page22)