PRACTITIONER POLICY PAPER
Prepared by Bourse Consult April 2012
CITY OF LONDON RENMINBI SERIES
London: a centre for renminbi business
City of London Economic Development PO Box 270, Guildhall, London, EC2P 2EJ www.cityoflondon.gov.uk/economicresearch
PRACTITIONER POLICY PAPER
Prepared by Bourse Consult April 2012
CITY OF LONDON RENMINBI SERIES
London: a centre for renminbi business
City of London Economic Development PO Box 270, Guildhall, London, EC2P 2EJ www.cityoflondon.gov.uk/economicresearch
London: a centre for renminbi business is published by the City of London. The author of this report is Bourse Consult. This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the author, Bourse Consult, and the City of London, give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein. April 2012 Š City of London PO Box 270, Guildhall London EC2P 2EJ http://www.cityoflondon.gov.uk/economicresearch
Bourse Consult contact details: Peter Cox PAC@bourse-consult.com
Raymond Sabbah RSB@bourse-consult.com
“Bank of China, as one of the leading providers of cross-border RMB products and services, fully endorses the efforts made by the City of London Corporation to position London as an offshore RMB centre. This is an important step in the process of encouraging the increased use of the RMB outside China and Bank of China is delighted to be an active participant in this initiative, which will not only benefit Europe and China, but will strengthen London`s position as global financial centre.” Wenjian Fang - Chief Executive Officer, Bank of China (UK) Limited, and General Manager, Bank of China Limited London Branch
“Barclays has had a long association with and strong commitment to China. As a leading global investment and corporate bank and given our large market share to trade renminbi and RMB denominated products in Hong Kong for our clients, Barclays is pleased to be part of this initiative to establish London as a gateway for Chinese banking and investment to and from Europe.” Chris Allen - Managing Director Legal - UK & Europe, Barclays “This report shows that London is ready – it has the product suite, the expertise and infrastructure to give corporates and investors the confidence to do business in RMB. As the global pool of assets in RMB grows, clients will reap the benefits from lowered costs of risk management.” Zar Amrolia - Global Head of Foreign Exchange, Deutsche Bank
“HSBC is fully committed and uniquely positioned to support the internationalisation of the RMB for the benefit of China and the global economy. This initiative reinforces London as a leading global financial centre and HSBC, with its expertise in RMB markets, welcomes the opportunity to contribute to its success.” Spencer Lake - Co-Head of Global Markets, HSBC
"The development of London as an offshore renminbi trading centre is something that we have supported for some time. The potential market is massive and London must continue to show its commitment to making it happen over a relatively short timescale, ahead of competing international financial centres. It is well placed to take advantage of the renminbi's internationalisation for the benefit of both Chinese and European businesses."
W Richard Holmes - CEO Europe, Standard Chartered Bank
Contents Executive Summary.............................................................................. 1 Introduction ........................................................................................... 4 1 The Development of the CNH Market ............................................. 6 1.1 The history of RMB internationalisation ................................................................ 6 1.1.1
Main dates and timeline........................................................................ 6
1.2 How the RMB currency controls operate ........................................................... 7 1.2.1
The clearing and settlement of RMB ................................................... 8
1.3 The offshore RMB market in Hong Kong ............................................................. 9 1.3.1
Deposits in offshore RMB ........................................................................ 9
1.3.2
Retail and corporate banking services ............................................... 9
1.3.3
Swaps, forwards and others OTC trades ...........................................10
1.3.4
Fixed income .........................................................................................10
1.3.5
Equity ......................................................................................................11
1.3.6
Repos in RMB .........................................................................................12
2 London as a Renminbi Centre ....................................................... 13 2.1 London’s opportunity...........................................................................................13 2.1.1
Time zone ...............................................................................................13
2.1.2
English law ..............................................................................................13
2.1.3
Regulatory framework .........................................................................13
2.1.4
Innovation and liquidity .......................................................................14
2.1.5
Benchmarks ...........................................................................................14
2.2 Engagement with the Chinese authorities .......................................................14 2.3 The City of London initiative on London as a centre for renminbi business 14
3 The Existing Capabilities of London ............................................... 16 3.1 Methodology ........................................................................................................16 3.2 Total deposits in London ......................................................................................17 3.3 The RMB retail banking market ..........................................................................17 3.4 The RMB corporate banking market .................................................................19 3.5 The RMB institutional and interbank market .....................................................20
3.5.1
Foreign exchange services and risk management products ........21
3.5.2
Borrowing and financing products ....................................................26
3.5.3
Investment products ............................................................................27
3.5.4
Custody and prime brokerage services ............................................28
4 Conclusions ..................................................................................... 29 Annex – Further Details on the Offshore RMB Market ...................... 31 A.1 The reasons behind internationalisation ...........................................................31 A.2 Offshore RMB initiatives........................................................................................32 A.3 The People’s Bank of China ................................................................................32 A.4 How the Hong Kong offshore RMB centre works.............................................33 A.5 The Hong Kong Monetary Authority (HKMA) ...................................................33 A.6 The flow of RMB from mainland China to Hong Kong and back .................34
Executive Summary China’s international trade has grown dramatically to make China the second largest economy in the world. However, the growth of China’s economic power has not been matched by the international use of its currency, the renminbi (RMB). China has now begun to encourage the use of the renminbi outside mainland China with a view to it eventually becoming a fully convertible global currency. As the controls on RMB have been relaxed over the last seven years, the global offshore (CNH 1) market centred in Hong Kong has grown exponentially. Hong Kong has developed as a centre for RMB business as a result of its location and strong trading relationships with mainland China, but also because it has been designated as the offshore clearing centre for RMB by the Chinese authorities. The emergence of the renminbi as a potential new global currency is naturally of great interest to London, the world’s leading international financial centre. China’s desire to increase the international use of the renminbi in a carefully controlled manner poses an opportunity for both parties. If the renminbi is to become a truly international currency, it will need to be used across the world. T his is where London’s position as the leading international financial centre can make an important contribution to China’s objective: •
London’s time zone, with a working day which overlaps with that of China, and the rest of the globe from New Zealand to Brazil, is advantageous;
•
The UK legal and regulatory systems are respected internationally;
•
London’s global financial community has a proven record of rapidly responding to new market needs, and a strong history of innovation and developing market efficiency; and
•
London’s global institutions collectively are able to bring massive liquidity to the markets. This is one of the factors behind London’s leading position in the forex market and the very strong position it has in international bond issuance.
The Chinese and UK governments have welcomed the private sector’s interest in developing the RMB market in London. Given the scale of the opportunity presented by the increasing international use of the renminbi, and London’s expertise as a financial centre, the City of London has established a group of leading banks to support the growth of RMB business in London. This study is the first deliverable of the ‘City of London initiative on London as a centre for renminbi business’. Maximising London’s position by working in partnership with the Chinese authorities and with counterparts in Hong Kong is one of the foundations of the City of London initiative. The vision for the initiative is for London to develop as a “western hub” for the international RMB market, as a complement to Hong Kong and other financial 1 Although there is a single source of RMB – the People’s Bank of China (PBoC) in mainland China – the currency has some different characteristics depending on whether it is held onshore or offshore. For the purposes of this report, ‘offshore’ is used to describe RMB held outside mainland China. The two pools of RMB trade in effectively different markets because the currency is not freely transferable to and fro across the border. The industry has labelled the offshore pool with a pseudo currency code – CNH – to distinguish it from onshore pool – CNY. CNH is widely used as the name for the global offshore renminbi market, centred in Hong Kong.
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centres. Members of the initiative are leading international banks with a strong presence in London and Hong Kong. HM Treasury, the Bank of England and the Financial Services Authority are observers. The initiative supports the outcome of the September 2011 UK-China Economic and Financial Dialogue and is closely associated with the ‘Hong Kong – London Forum’, established in January 2012 between the UK Chancellor of the Exchequer, The Rt Hon. George Osborne and Norman Chan, Chief Executive of the Hong Kong Monetary Authority. The report shows for the first time that a broad range of renminbi-denominated products and services in the retail, corporate and institutional and interbank markets are already being offered in London. It demonstrates that business generated and/or executed in London is becoming an important part of the global CNH market, cleared through Hong Kong. These London renminbi products and services enable international transactions to be conducted cost effectively and securely and allow risk to be hedged and managed. The report shows the following volumes for renminbi business generated and/or executed in London in 2011. Deposits The total value of London deposits revealed in the survey is in excess of ¥109 billion. This figure is made up of two components: customer deposits, which amount to ¥35 billion, and insitutional and interbank deposits (deposits held by one bank on behalf on another) - which amount to ¥74 billion. This data indicates that a pool of RMB liquidity is being established which will be valuable in developing the potential of London as an RMB centre. The customer deposits - ¥35 billion - can be compared with the total volume of CNH customer deposits in Hong Kong in December 2011 of ¥589 billion. Retail banking In retail banking a range of RMB services are on offer in London. The number of banks offering personal accounts is still relatively small and the amount deposited in them is not yet significant. However, the value of private banking accounts is much more substantial with total deposits in excess of ¥3.6 billion. This indicates a significant growth opportunity in London for private banking services in RMB and would play to London’s strengths as an important base for wealth management services. Corporate banking A full range of RMB corporate banking services are offered in London, principally focused on forex, corporate accounts and trade financing. There is substantial growth potential in this segment. Not all institutions currently offer corporate banking services. As the global RMB market continues to grow, more banks can be expected to offer a wider range of corporate products and services in RMB including treasury management, supply chain services and debit and overdraft facilities. Institutional and interbank market Commensurate with London’s role as a leading centre for foreign exchange, a full range of RMB forex products is actively traded in London. Spot RMB forex trading in London is running at $0.68 billion per day and is estimated to be 26% of the global offshore RMB spot market. Trading in non-deliverable forex products is running at 2
significant levels and is expected to shift into spot and other deliverable forex products as currency controls are eased and offshore RMB liquidity increases. Future growth The development of renminbi denominated products and services in London is a relatively recent phenomenon, but the data shows that London’s market share is growing strongly and is becoming a significant part of the global CNH market. As awareness of renminbi denominated products and services grows amongst corporate and institutional customers, volumes can be expected to increase and further renminbi denominated products and services will be offered by banks and financial institutions in London. London can expect to significantly increase its business volumes in areas such as corporate and institutional banking and build on its strengths as a centre for bond issuance. The City of London initiative will support a long term sustainable renminbi market in London, to make trade processing easier for European corporates and offer customers and investors the chance to invest, trade, bill and bank in RMB. London’s prime position as an international financial centre and its growing level of renminbi-denominated business put it in a very good position to be a major player in developing the international RMB market. There is a strong commitment amongst London’s global institutions to develop London’s renminbi business, in turn facilitating the emergence of the yuan as one of the foremost currencies of the world alongside the US dollar and the euro.
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Introduction The rapid growth of China’s international trade has had a dramatic impact on its economy. China has grown in a short time to become the second largest economy in the world. However, the growth of China’s economy has not been matched by a commensurate increase in the international use of its currency – the renminbi (RMB) – which is still subject to tight currency controls. China has begun to address this situation and it is now working to increase the international use of the renminbi. To this end it has begun to facilitate and encourage the use of the renminbi outside mainland China. The internationalisation of the renminbi is being closely watched by the financial world and it is anticipated that the renminbi will become fully convertible in the foreseeable future. With the prospect of a new global currency emerging of a size and international importance on a par with the US dollar and the euro, there has naturally been great interest in the consequences for London. London’s position as the world’s leading international financial centre and China’s desire to develop the renminbi into a world currency in a carefully controlled manner pose an opportunity for both parties. It is in this context that the City of London Corporation, working on behalf of London’s global financial services community, has commissioned this report. This study is the first deliverable of the City of London initiative on London as a centre for renminbi business, which aims to encourage the development of renminbi products and services in London. The vision of the initiative is for London to develop as a “western hub” for the offshore RMB market as a complement to Hong Kong and other financial centres. The initiative’s overarching aim is to contribute to a private and public sector strategy for the development of London as a c entre for international RMB business. The City of London initiative has established that there is already significant renminbi business being done in London, including services for retail clients, services for corporate clients and interbank and institutional business. Together, these products and services enable international transactions to be conducted cost effectively and securely and allow risk to be hedged and managed. However, to date, information on which products and services are being offered and the scale of the business has not been collected and published. The purpose of this study is to quantify the existing capabilities of London in renminbi-denominated products and services. The report presents a picture of the renminbi products and services offered by London’s global institutions and the volume of business traded in London in 2011. The report is in four sections. Section one gives background on the development of the offshore market in renminbi - “offshore” meaning outside mainland China and including Hong Kong. Section two discusses the development of London as a centre for renminbi business. Section three reports on the capabilities of London in renminbi products and services and the related business volumes. Section four draws conclusions on London’s current position as a centre for renminbi business and future prospects. Throughout the report the terms renminbi, RMB or yuan are used when referring generally to the currency of China. When referring more specifically to either 4
onshore or offshore currency the terms CNY for onshore renminbi and CNH for offshore renminbi are used as shorthand. Monetary amounts of yuan are denoted using the symbol ¥. The results in section three are based on data collected from a sample of 13 banks – considered to cover the large majority of renminbi business in London – from which total volumes have been extrapolated. Care has been taken by the surveyed banks to separate business generated and/or executed in London from that which takes place in Hong Kong (or other financial centres) but is facilitated in London. Only the former is recorded here, therefore providing a picture of London’s overall renminbi business volumes. These figures provide the baseline for the future growth of a long term sustainable market in London that supports the internationalisation of the RMB – to make trade processing easier and offer customers the chance to invest, trade, bill and bank in renminbi.
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1
The Development of the CNH Market
To put into context London’s developing role as a centre for RMB business it is useful to look at the current market for RMB related business outside mainland China and the way that it has developed. This section gives an overview of the development of the offshore RMB market and its current status. Further detail is given in the Annex.
1.1 The history of RMB internationalisation Promotion of the international use of the RMB by the Chinese government has its origins in 2003. However, the concerted process of RMB internationalisation got under way more recently, in 2007, and it has had a significant impact only in the last two years or so. T he initial focus of the internationalisation programme has been Hong Kong, where the proximity to mainland China and reassurance provided by the “one country, two systems� principle have been key factors. It has allowed the use of RMB outside mainland China to be facilitated and even promoted in Hong Kong whilst carefully managing the purposes for which RMB may flow between the international and domestic RMB markets.
1.1.1 Main dates and timeline The following timeline shows the major developments relating to the internationalisation of the RMB. Chart 1.1 in section 1.3.1 demonstrates the impact of the policy measures on offshore RMB deposits and particularly the very significant increase in deposits since mid-2010 when the cross-border trade settlement scheme was extended.
6
Figure 1.1 – RMB Internationalisation Timeline
1.2 How the RMB currency controls operate RMB passes from the mainland to the offshore market by a variety of means: •
Through import trade denominated in RMB and outbound capital flows;
•
Through investors and tourists from mainland China taking cash out of the country;
•
Through Hong Kong residents who are allowed to purchase RMB and have built up RMB deposits in Hong Kong banks; and
•
Through the actions of the Bank of China and the HKMA in operating the Hong Kong RMB Settlement System.
RMB is accepted on the streets of many South East Asian cities in addition to Hong Kong – a result of the growing trade between China and its neighbours. 7
Once RMB is held outside mainland China it can be freely used for any purpose provided it is not remitted to the mainland. Therefore it can be used for payment or investment outside mainland China and can also be freely converted into any currency at the prevailing offshore market forex rate. RMB can be remitted to the mainland but is subject to specific regulations restricting the purpose of the remittance and the parties to which it can be transferred.
1.2.1 The clearing and settlement of RMB In mainland China settlement of RMB takes place through the national RTGS system, CNAPS, operated by the PBoC. This is only accessible to mainland China clearing banks. In Hong Kong the RMB Settlement System is operated under the auspices of the HKMA. The service uses the Hong Kong RTGS infrastructure, which is also used for settlement of Hong Kong dollars, US dollars and euros, and is operated by Hong Kong Interbank Clearing Ltd. The Bank of China (Hong Kong) acts as the central clearing bank for the RMB Settlement System. Hong Kong banks wishing to use the service open accounts with BoCHK and payments are cleared across those accounts. T he service covers cheque clearing, an automated system for remittance processing and RMB bank card payments as well as interbank payments. Participating banks are allowed to convert foreign currency into RMB and vice versa by buying or selling the foreign currency with BoCHK at the onshore exchange rate if the RMB is related to trade flows. BoCHK in turn buys or sells the foreign currency to the PBoC in Shanghai in return for RMB. The HKMA refers to this process as position squaring. B y this mechanism RMB is brought from the mainland to Hong Kong or returned to it. PBoC sets a quarterly limit – a settlement quota – on the volume of this exchange which can be done by BoCHK but in the event that the limit is exceeded the HKMA has a currency swap line with the PBoC to provide emergency liquidity. The RMB Settlement System is linked with the Hong Kong dollar RTGS system to allow banks to square their RMB positions on a Payment vs Payment (PvP) basis. It is also connected to the US dollar, HK dollar and euro RTGS systems to allow USD/RMB, HKD/RMB and EUR/RMB transactions to be done on a PvP basis.
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1.3 The offshore RMB market in Hong Kong 1.3.1 Deposits in offshore RMB The largest accumulation of offshore RMB is in Hong Kong and results from the actions of the Chinese authorities to encourage its use outside the mainland and to develop Hong Kong as a centre for RMB-related business. Chart 1.1 – Hong Kong RMB deposits 700
600
500
¥ bn
400
300
200
100
0
Source: HKMA Monthly Statistical Bulletin
Chart 1.1 shows the growth of RMB deposits in Hong Kong since the beginning of the programme of internationalisation of the currency. T here was a sharp increase in deposits from mid-2010, when significant easing of exchange controls for traderelated business by corporates was introduced, to the end of 2011 when there was a slight fall even though net trade settlement flows of RMB continued to be into Hong Kong. This is generally accepted to be a reflection of the additional investment choices offshore RMB holders now have as a result of recent regulatory changes. The total volume of CNH deposits in Hong Kong at the end of 2011 – the year covered by the survey of London banks - was ¥589 billion. This is a very significant 87% increase from a year previously.
1.3.2 Retail and corporate banking services Banks in Hong Kong offer a range of retail and corporate banking services to their customers. The proximity to mainland China and schemes such as that which allows Hong Kong residents to convert other currencies into RMB up to a daily limit have helped to drive usage of the currency offshore by individuals. Hong Kong banks offer corporate banking services to their many corporate clients with a trading or investment relationship with mainland China. This includes: treasury management - payments, transfers, and cash management; forex services and 9
deposits provided to corporations; commercial loans in RMB to companies for their investment and day-to-day operations; import/export activity including import and export financing related directly to the commercial activity; and letters of credit.
1.3.3 Swaps, forwards and others OTC trades The offshore RMB market in Hong Kong currently offers a range of products. In addition to exchange of CNH into a wide range of other currencies there are also active markets in delivered and non-delivered forwards, interest rate swaps and cross currency swaps. Recently, forex options have been introduced but volumes so far have been low.
1.3.4 Fixed income There have been two types of international RMB-denominated bond issues. F irstly RMB-denominated bonds sold in Hong Kong and to some extent internationally, which are referred to as Dim Sum bonds, and secondly RMB-denominated bonds issued by non-Chinese entities and sold only to mainland Chinese investors – socalled Panda bonds.
1.3.4.1 The primary market Issuers of Panda bonds were not initially allowed to take the proceeds offshore but this regulation was relaxed in late 2010 and certain classes of international issuer are now, with prior permission, allowed to issue on the mainland and repatriate the proceeds. The Dim Sum bond market was launched in 2007 and has grown significantly since the 2010 de regulations. Ho wever, demand for Dim Sum bonds by RMB deposit holders is said to have outstripped supply because, until October 2011, the regulatory process had been unclear and potential issuers had not been sufficiently confident that they could obtain the necessary permissions to use the proceeds for investment in mainland China. The issue in Hong Kong by the Chinese government in August 2011 of ÂĽ20 billion of bonds was an important step in the growth of the market and an indication that China will continue to issue bonds for sale offshore. T here has been continuing growth since the announcement in August 2011 of more codified rules to govern the permission to remit the proceeds of a bond issue to mainland China.
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Chart 1.2 – Offshore RMB bond issuance 35
30
25
¥ bn
20
15
10
5
0
Source: CMU, Barclays Capital
1.3.4.2 The secondary bond market The offshore demand for bonds from depositors with RMB accumulated through trade-related transactions and from investors wishing to gain exposure to the expected appreciation of the yuan currently outstrips supply. Most investments are buy-and-hold and that, combined with the relatively small amount in issue, means that there is not a very liquid secondary market in Dim Sum bonds. Since August 2010 foreign central banks, RMB clearing banks and cross-border RMB trade settlement participating banks have been able to participate in the interbank bond market in mainland China to help them manage their RMB positions.
1.3.5 Equity So far there has been only one IPO of an RMB denominated equity – a Real Estate Investment Trust (REIT). However, Hong Kong Exchanges and Clearing (HKEx) is actively encouraging further issues, promoting the opportunity provided by a pool of offshore RMB held by investors with limited investment options for obtaining a reasonable return on their cash. In October 2011 HKEx launched a Trading Support Facility which will facilitate secondary market trading in RMB-denominated equities by allowing Hong Kong dollars (HKD) to be used for buying the shares. At the investor’s request the Central Clearing And Settlement System (CCASS) – the Hong Kong CSD – will automatically carry out the foreign exchange as part of the trade settlement process. When the 11
shares bought through this service are subsequently sold the CCASS will convert the proceeds into HKD for the seller.
1.3.6 Repos in RMB A linkage between the RMB Settlement System and the Central Moneymarkets Unit (CMU), which acts as the central depository and settlement system for Hong Kong debt securities, allows the CMU to offer an Automatic Repo Facility for RMBdenominated bonds. However, the volume of such transactions is low at present. A new bank-to-bank repo facility to be launched shortly is expected to increase the volume of repos traded.
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2
London as a Renminbi Centre
2.1 London’s opportunity London is the most international financial centre in the world. It offers business in a full range of international financial services – including forex trading, banking, insurance and asset management - and is the world leader in: •
Cross-border bank lending with an 18% global share
•
OTC interest rate derivatives with a 46% global share
•
Foreign exchange with an average daily turnover in London approaching $2trn and an almost 40% global share.
Given its international reach, the London financial services industry can be expected to play an important role in new financial markets such as the development of the global CNH market. Financial institutions with a strong London presence already play an active role in the Hong Kong market, and have established complementary business lines in London. Indeed, London is already a g rowing centre for RMB business, using the existing Hong Kong infrastructure for clearing. Further development of London’s capabilities and volumes in international RMB business will significantly enhance London’s existing strengths as an international financial centre and contribute significantly to the Chinese government’s ambitions to increase international use of the yuan. London has some key strengths which will enable the London market in RMB instruments to develop as the internationalisation of the yuan progresses.
2.1.1 Time zone In a global market which works 24 hours a day, having a working day which overlaps with that of China and the rest of the globe from New Zealand to Brazil is extremely important. By contrast New York is almost exactly on the opposite side of the globe to China - sleeping when the other side is working and vice versa. London’s offer is complementary to Hong Kong, given the significant difference in time zone, allowing longer trading hours for businesses in EMEA and beyond.
2.1.2 English law Investors worldwide are familiar with, and confident in, the English legal framework. Investment products governed by English law are likely to have wider appeal than similar products governed by other legal regimes and London is widely regarded to have the most expert grouping of international financial services lawyers in the world.
2.1.3 Regulatory framework The Bank of England and the FSA are respected internationally. T heir experience and expertise are likely to be seen by the Chinese authorities as important contributors to London becoming a successful RMB centre. As the Chinese authorities want to ensure that the internationalisation of the RMB does not cause 13
market disruption, either offshore or onshore, the close understanding developed between the respective regulators and authorities is expected to have a positive effect on the development of London as an RMB centre.
2.1.4 Innovation and liquidity London has a strong history of innovation in financial markets and developing market liquidity and efficiency. London’s global financial community has a proven record of rapidly responding to new market needs as they have emerged from the opening up of financial markets across the world. Collectively London’s global institutions are able to bring massive liquidity to the markets. This is one of the factors behind London’s leading position in the forex market and the very strong position it has in international bond issuance.
2.1.5 Benchmarks London market benchmarks, such as exchange rate fixes or BBA Libor interest rates, are referenced in trillions of dollars’ worth of commercial contracts, funds, portfolios and derivatives around the world. L ondon’s experience in creating benchmarks which are recognised and used internationally could be used to create RMB benchmarks that give confidence to the trading community and help to cement London’s position as a key international RMB centre.
2.2 Engagement with the Chinese authorities Whilst London is currently doing RMB business and the market is growing, the offshore RMB market has special characteristics. The Chinese authorities will want to be sure that any relaxations in currency controls meet their objectives and do not have any unforeseen negative consequences. This is most likely to be achieved if the two governments, their regulatory institutions and the market participants understand each other’s objectives and work together to internationalise the yuan. Thus the UK community – the government, the regulators and the financial services industry – have an opportunity to maximise London’s position by working in partnership with the Chinese authorities and with counterparts in the Hong Kong SAR. The work to bring about this collaboration is well under way. At the UK-China Economic and Financial Dialogue in September 2011, the Chancellor of the Exchequer and Vice Premier “welcomed the private sector interest in developing the offshore RMB market in London and the growth of the market to date”. They also agreed to set up “a joint collaboration project involving the private sector on the development of RMB-denominated financial products and services in London”.
2.3 The City of London initiative on London as a centre for renminbi business Building on the agreement at the UK-China Economic and Financial Dialogue, and the strong desire of London’s private sector to further develop the market for renminbi products and services, the ‘City of London initiative on London as a centre for renminbi business’ has been established. The vision for the initiative is for London to develop as a “western hub” for the international RMB market, as a complement to Hong Kong and other financial centres. Current members of the initiative are leading international banks with a strong presence in London and Hong Kong: Bank 14
of China, Barclays, Deutsche Bank, HSBC and Standard Chartered. HM Treasury, the Bank of England and the Financial Services Authority are observers to the initiative. The initiative supports the outcome of the UK-China Economic and Financial Dialogue and is closely associated with the ‘Hong Kong – London Forum’, established in January 2012 between the UK Chancellor of the Exchequer, The Rt Hon. George Osborne and Norman Chan, Chief Executive of the Hong Kong Monetary Authority to promote co-operation on the development of offshore RMB business. The role of the initiative is to consider practical measures to support the development of London as a centre for RMB business. It aims to: •
Provide leadership to the wider financial markets on the technical, infrastructure and regulatory issues relevant to the development of the RMB product market in London;
•
Advise HM Treasury on maximising London's capacity to trade, clear and settle RMB and articulate practical next steps and long term aims for the development of the RMB market in London. Additionally, the group advises HM Treasury and other UK authorities on any financial stability concerns the members may perceive; and
•
Develop and maintain, as appropriate, a private sector dialogue on the offshore RMB market with regulators in Hong Kong and mainland China to complement that which is already maintained by the UK public sector.
The City of London initiative is focussing on: the development of London’s products and services offering; increasing the awareness of the services available in London; the development of a more liquid global RMB (CNH) market, including developing liquidity in London; understanding the needs of the end-users of offshore RMB products and services, i.e. corporates and investors; and identifying ways to enhance the Hong Kong clearing and settlement infrastructure to accommodate greater London business.
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3
The Existing Capabilities of London
3.1 Methodology As all RMB instruments traded in the City are OTC products and traded bilaterally, no one central source of statistical information exists. In order to assess the size of the London renminbi market for this study each of the most active City banks in the RMB market were approached and asked to provide details of their volumes in a series of financial instruments. A representative sample of 13 banks was chosen, which is estimated to cover approximately 85% of the market and a detailed questionnaire was designed and sent to each one. The questionnaire was divided into three sections: •
Business with retail clients;
•
Business with corporate clients; and
•
Interbank and institutional business.
Ensuring the consistency of the data returned was particularly important, given that the global market clears through Hong Kong, and so guidelines on collecting this information were laid down. I n order to avoid any double counting of deals with Hong Kong, the definition of “London” business used for this report is any deal generated and/or executed in London. Care was also taken to avoid any misunderstanding in the definition of the individual financial instruments and the way these should be accounted for. However, a survey of this kind is not entirely straightforward. The special characteristics of the offshore RMB market mean that statistics for specifically London business in RMB instruments do not neatly fall out of many banks’ information systems and the authors are grateful to the banks for efforts they made to provide the particular data required. Inevitably there remains some possibility that the banks have collected the data on slightly different bases. The data provided by the banks was then aggregated and extrapolated to produce total market figures. The extrapolation took account of some incomplete reporting from the surveyed banks and the proportion of the market covered by the sample. The data was complemented with estimates from the banks themselves of the total London market in each of the financial instruments and related data published by the Bank of England, SWIFT and Thomson Reuters. A lthough this third-party data is collected on different bases, it has allowed comparisons to be made with data collected in this study in order to create as robust a picture as possible of the London market.
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3.2 Total deposits in London Deposits (cash accounts and time deposits) have been used as an indicator of the growth in the offshore RMB market. Total London deposits revealed in the survey are in excess of ¥109 billion. This figure is made up of two components: •
•
Deposits in accounts for personal and corporate customers customer deposits - which amount to ¥35 billion. This number can be compared with HKMA figures which give a total volume of CNH customer deposits in Hong Kong in December 2011 of ¥589 billion; and Deposits held by one bank on behalf of another – interbank deposits - and institutional deposits, which amount to ¥74 billion.
The growth of a pool of offshore RMB naturally began in Hong Kong where the development of settlement facilities – creating the CNH market, the proximity to the mainland and also the possibility for HK residents to buy regularly a fixed amount of CNH have had a big influence. Until mid-2010 the Hong Kong deposit pool was below ¥100 billion. Since then there has been very rapid growth. The fact that a volume of deposits has already been built up in London in a relatively short period of time is very relevant. It indicates that a pool of RMB liquidity is being established which will be valuable in developing the potential of the City as an RMB centre, not only in forex but also in investments and other instruments. London’s strength is in its institutional investor base; it is anticipated that as corporate and institutional deposits grow, so too will the liquidity of the London market.
3.3 The RMB retail banking market In this report the term retail banking market includes all banking services to individuals. Services to all corporate entities are excluded from this group. The deposit category includes all time deposits, certificates of deposit and similar products. Savings accounts are those for individual investors and payments and transfers are all the regular transfers of funds and remittances done in RMB by individuals. Private banking refers to the special services offered by banks for high net worth individuals covering investment services, advice, deposits and cash related products. The survey separates private banking services from standard brokerage services for buying and selling of RMB-denominated equities and bonds.
17
Chart 3.1 – RMB retail banking services offered in London 10,000
Annual Volume - ¥mn
1,000
100
3,600 496 155
10
107
1
Payments/Transfers
Deposits
Saving Accounts
Source: Bourse Consult survey
Private Banking
Logarithmic scale
A range of retail accounts are available to customers in London. However, the number of institutions offering these services is relatively limited. 64% of the banks surveyed offer RMB accounts to retail customers in London. Of this group, 57% offer regular personal accounts and 43% offer private banking accounts. As the banks participating in this survey are generally large or China-focused institutions, this is a relatively small percentage. However, demand is expected to grow and new products are being developed. For example, currently none of the banks surveyed offers a credit card or traveller’s cheque facility in RMB, although one bank indicated that it would soon be able to offer credit cards in RMB to their clients. The banks offering regular retail accounts also offer: •
Internet access to their RMB accounts;
•
Payment and transfer services in RMB. The total amount of payments/ transfers made during 2011 were close to ¥500 million; and
•
Savings accounts. Total retail deposits in personal and savings accounts at the end of 2011 were in excess of ¥250 million.
Total deposits in private banking accounts at the end of 2011 were in excess of ¥3.6 billion, a significant figure. Only one bank offers investment services in equities to its retail clients and just two banks facilitate trading in Dim Sum bonds. Comments on results for retail banking services Although retail accounts are available, it would appear that retail clients are currently not widely served in London for RMB services as few banks offer these accounts. This situation is different from that in other major currencies - for instance it is very straightforward to open a London account in US dollars, euros, Swiss francs or yen. Offering credit cards in RMB would be very useful for frequent travellers to
18
mainland China, and it is one area where the banks could become more commercially competitive. On the deposit side the amounts in regular personal accounts reported by the banks surveyed are not significant, but interestingly the value of private banking accounts is much more substantial and this could indicate that there may be significant demand in London for private banking services in RMB. This would build on London’s strengths as a centre for wealth management services. Given the level of deposits in private banking accounts, the potential for deposits and investment services is probably much greater than the figures in the survey indicate.
3.4 The RMB corporate banking market In this report the corporate banking market refers exclusively to services for corporations and does not include large accounts of individuals. These customers are likely to be corporations with a trading or investment relationship with China. The corporate accounts figures relate to cash held in these accounts. Treasury management refers to the specific services offered by banks to, generally, medium/ large corporations in payments, transfers, and cash management. Forex services and deposits in this category refer only to services provided to corporations. Commercial loans include all loans in RMB made by banks to companies for their investment and day-to-day operations. The import/export activity is one of the important services offered in the corporate banking market and includes import and export financing related directly to the commercial activity and does not include commercial loans. Trade services and letters of credit refer specifically to those issued in London and not, for instance, letters of credit to China. The corporate market in London represents a more significant business opportunity than the retail market. Hong Kong’s proximity to mainland China and the familiarity with the CNH market has helped it to develop the retail segment, but London will build its RMB market on the strength of its role as a centre for international business and corporate transactions. Banks were asked whether they offered the following services and to record the volume of business in each. The survey shows that all these services are on offer in London: • • • • • • • • • • • •
Corporate accounts; Treasury management; Forex services; Term deposits; Payment and cash management; Debit and overdraft facilities; Online facilities; Commercial loans; Trade services; Letters of credit; Supply chain services; and Import/export financing.
19
The data for banks offering corporate banking services is as follows. •
64% of the banks surveyed offer corporate accounts in RMB with the total amount of cash on these accounts at the end of 2011 being ¥31 billion.
•
In the field of more sophisticated services for corporations, treasury management is only offered by 36% of the banks surveyed, a r elatively low share. However, 82% offer forex services amounting to the annual total of ¥60 billion for 2011.
•
45% of those surveyed offer deposit facilities in RMB for their corporate clients totalling ¥121 million at the end of 2011.
•
The surveyed banks in London offer a good range of services for corporate clients. 6 4% offer payments and cash management, 36% offer debit and overdraft facilities and 36% offer online and internet access.
•
During 2011 a total of ¥280 million of commercial loans was made to corporations through four London based banks.
Trade related services Of the trade related services, 64% of the banks surveyed offer trade services, 64% offer facilitated letters of credit in RMB, 45% offer supply chain services and 73% offer import/export services. Not only is the number of banks offering these services significant but so also is the amount of RMB involved. T he following are annual volumes for 2011: •
Commercial loans
¥280 million;
•
Trade services
¥88 million;
• Import/Export financing • Letters of credit
¥16.3 billion; and ¥274 million.
Comments on results for corporate banking services These figures show that corporate clients and, particularly, importers and exporters are relatively well served by the London banks. The products and services that trading houses need in RMB are found in a good range of major banks and Chinabased banks. The facilities are substantial, including supply chain and trade services and the possibility to open letters of credit directly in RMB. The total amount of trade finance was substantial during 2011 - more than ¥16 billion. However, while corporate clients are currently able to access a range of RMB services, there is considerable room for the growth of these services in London. Additional banks providing corporate and trade related services and financing would provide a more competitive offer for corporate clients accessing London’s services and would increase London’s liquidity and standing as a global marketplace for RMB.
3.5 The RMB institutional and interbank market The institutional and interbank market is the largest and broadest of the three market divisions in the survey. Institutional is a broad definition of the buy side: investment funds, pension funds, hedge funds, insurance companies and sovereign funds. The interbank market refers to the trades settled between banks.
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3.5.1 Foreign exchange services and risk management products The forex category includes all transactions done on a currency basis including spot (for immediate delivery) and forward (for delivery in the future). The swaps and options are all traded over the counter on a bilateral basis between two counterparties. The forex, swaps, options, interest swaps and options and cross currency swaps are OTC derivative instruments used by banks for hedging and risk management purposes. Non-deliverables are specific cash settled instruments for non-convertible currencies. RMB non-deliverable contracts are predominantly based on the onshore (CNY) exchange rate and traded offshore specifically because trading in deliverable CNY is not possible offshore. The forex numbers include all currencies exchanged with RMB, but the majority of the trading is in the USD/RMB pair. London is at the heart of the world’s foreign exchange markets, and the provision of foreign exchange and risk management products is therefore at the forefront of London’s RMB product offering. London offers the full range of RMB foreign exchange services; anything available in Hong Kong is also available in London.
Chart 3.3 – Deliverable RMB forex instruments in London – market mix 0.5% 0.4%
6%
Spot FX
27%
Forwards FX Swaps
36%
FX Options Interest Rate Swaps 31%
Cross Currency Swaps
Source: Bourse Consult survey
Spot forex The survey of London banks gives an average daily volume of spot RMB forex traded in London during 2011 of US$ 0.68 billion. Through discussions with the surveyed banks, the volume of CNH traded in Hong Kong is estimated at US$ 1.5 billion per day. The total volume of CNH traded globally - including CNH trading in other forex centres such as New York and Singapore – is estimated to be US$ 2.7 billion daily.
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Chart 3.4 – Offshore RMB spot forex – global market
18% Hong Kong
26%
London
56%
Other centres
Source: Bourse Consult survey
London’s spot RMB forex trading already represents 26% of the global offshore RMB spot forex market. This market grew last year by over 80% as shown in chart 3.5. For comparison, these figures for the global CNH market compare to US$ 15 billion of daily volume for onshore CNY. Chart 3.5 – Six-monthly growth in London RMB forex - spot 60%
50%
40%
30%
20%
10%
0% Apr 2011
Oct 2011
Source: London Foreign Exchange Joint Standing Committee
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The data for other deliverable RMB forex instruments is as follows. •
Deliverable forwards: 91% of the surveyed banks offer deliverable forwards. The average daily volume of deliverable forwards established in the survey is US$ 790 million.
•
Deliverable forex swaps: 91% of the surveyed banks offer deliverable forex swaps. The average daily volume of deliverable forex swaps established in the survey is US$ 910 million.
•
Deliverable forex options: 82% of the surveyed banks offer deliverable forex options. The average daily volume for deliverable forex options established in the survey is US$ 150 million.
•
Deliverable interest rate swaps: 45% of the surveyed banks offer deliverable interest rate swaps. The average daily volume for deliverable interest rate swaps established in the survey is US$ 11 million.
•
Deliverable cross currency swaps: 73% of the surveyed banks offer deliverable cross currency swaps. The average daily volume of deliverable cross currency swaps established in the survey is US$ 12 million.
Chart 3.6 – Non-deliverable RMB FX instruments – market mix
1% 0.3%
Forwards 30%
FX Swaps FX Options 4%
65%
Interest Rate Swaps Cross Currency Swaps
Source: Bourse Consult survey
Non-deliverable forwards 73% of the surveyed banks offer non-deliverable forwards. The average daily volume of non-deliverable forwards established in the survey is US$ 5.5 billion.
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Chart 3.7 – Six-monthly growth in London RMB forex – non-deliverable forwards 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Apr 2011
Oct 2011
Source: London Foreign Exchange Joint Standing Committee
The data for other non-deliverable RMB forex instruments is as follows. •
Non-deliverable forex swaps: 45% of the surveyed banks offer non-deliverable forex swaps. The average daily volume of non-deliverable forex swaps established in the survey is US$ 360 million.
•
Non-deliverable forex options: 64% of the surveyed banks offer nondeliverable forex options. The average daily volume of non-deliverable forex options established in the survey is US$ 2.6 billion.
•
Non-deliverable interest rate swaps: 36% of the surveyed banks offer nondeliverable interest rate swaps. The average daily volume of non-deliverable interest rate swaps from the survey is US$ 21 million.
•
Non-deliverable cross currency swaps: 45% of the surveyed banks offer nondeliverable cross currency swaps. The average daily rate of non-deliverable cross currency swaps from the survey is US$ 50 million.
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Chart 3.8 – Six-monthly growth in London RMB forex – overall market 30%
25%
20%
15%
10%
5%
0% Apr 2011
Oct 2011
Source: London Foreign Exchange Joint Standing Committee
Comments on results for foreign exchange services and risk management products The fact that there are significant volumes in non-deliverable products reflects the non-convertible status of RMB. As currency controls are eased and offshore liquidity in RMB increases a shift from non-deliverable to deliverable products can be expected. This alone would significantly boost volumes in spot forex over time. The data collected in the survey relates to trading over the whole of 2011. Anecdotal evidence from the banks is that non-deliverable forward volumes at the start of 2012 have reduced and spot volumes increased, suggesting that the trend towards deliverable products may be under way. It is not possible directly to compare the foreign exchange services and risk management product data with data from Hong Kong or Singapore, as this level of detail is not available for these centres. However, it is possible to compare the three main elements with the daily volumes traded in London for other emerging currencies to understand the comparative picture.
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Table 3.1 - London forex trading in emerging currencies
Non–deliverable forwards
Non-deliverable options
Brazilian real
6,168
1,815
S. Korean won
6,309
1,151
Russian rouble
1,497
800
Indian rupee
4,627
492
Chinese yuan
5,500
2,600
Average Daily Volumes (US$)
Source: London Foreign Exchange Joint Standing Committee and Bourse Consult Survey
What is evident from these figures is that the volumes traded in London are already considerable and in line with, or surpass, volumes traded in other emerging countries’ currencies. Additionally, interbank foreign exchange services and risk management products are widely available in London as the great majority of surveyed banks offer spot, forwards, swaps and options. The results from the survey are consistent with the SWIFT data for Q4 2011, which shows that London accounts for 46% of SWIFT RMB forex confirmation transactions not including China and Hong Kong volumes.
3.5.2 Borrowing and financing products This category includes the instruments for raising money from the capital markets. In the survey banks were asked whether they offered services in bond issuance and collateralised lending. T he survey shows that both these services are on offer in London. No business volumes were recorded for collateralised lending, hence the focus here is on bond issuance. Only 36% of the surveyed banks offered a RMB bond issuance service. Whilst all new RMB bonds in 2011 were ultimately issued through CMU in Hong Kong, there was RMB bond origination activity in London. Principally the issuers were UK or European names and there was some distribution to western investors through European sales desks. This activity totalled RMB 7.1 billion. One issue was even listed on the London Stock Exchange. Comments on results for borrowing and financing products These numbers show that RMB bond issuance activity is at an early stage in London, but this is understandable given that the issuing of Dim Sum bonds is relatively new and Hong Kong has naturally taken the lead. As London is historically a centre for Eurobonds and for corporate financing, it is likely that London’s share of issuance will increase as capital account controls are liberalised by the Chinese authorities and the scope for inward investment enlarges.
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3.5.3 Investment products Included in this category are: •
All RMB time deposits and certificates of deposit for institutional clients;
•
Trading of RMB denominated bonds (not issuance); and
•
Structured products linked to forex, interest rates, equities and commodities.
The survey shows that all these products are on offer in London. Some products did not have business volumes recorded in the survey; those with recorded business volumes are shown in chart 3.10. Chart 3.10 – Investment product volumes 80
70
Annual Volume - ¥bn
60
50
40
30
20
10
0
Time Deposits, CDs
Dim Sum Bond Trading
FX linked structured deposits/notes
Interest rate linked structured deposits/notes
Source: Bourse Consult survey
The data for investment products is as follows. •
Time deposits and certificates of deposit: 45% of the surveyed banks offer time deposits and certificates of deposit. The annual volume for 2011 in RMB deposits and RMB certificates of deposits established in the survey was ¥74 billion.
•
Trading in Dim Sum bonds: 55% of the surveyed banks offer trading in Dim Sum bonds. The annual volume for 2011 in Dim Sum bonds trading established in the survey was ¥28 billion.
•
Forex linked structured deposits/notes: 55% of the surveyed banks offer these products. The annual volume for 2011 in RMB forex linked structured deposits/notes established in the survey was ¥1.7 billion.
•
Interest rate linked structured deposits/notes: 36% of the surveyed banks offer these products. The annual volume for 2011 in RMB interest rate linked structured deposits/notes established in the survey was ¥1.6 billion. 27
•
RMB funds: This category covers investment funds denominated in RMB. 18% of the surveyed banks offer RMB funds. The annual volume for 2011 in RMB funds established in the survey was ¥38 million.
•
Other products: 36% of the surveyed banks offer equity linked structured deposits/notes, 27% offer commodity linked structured deposits/notes and 27% offer RMB equities but in these three products the volume is not yet significant.
Comments on investment products results The above figures show a significant amount of RMB deposits in London amounting to some ¥74 billion. This further confirms the strong potential for London in the RMB deposit area. For a product that is relatively new to investors, the volume of Dim Sum bond trading is also significant at ¥28 billion. The RMB repos market is small even in Hong Kong but as the global CNH market grows, trading in such products can also be expected to increase.
3.5.4 Custody and prime brokerage services Custody is the service offered by banks for the safe keeping of securities. Prime brokerage services are trading operations designed particularly for hedge funds and clients that are very heavy users of trading services. T he survey has recorded services which are specifically offered in RMB in London. Custody services in RMB Only 18% of the surveyed banks operate custody services in RMB from London. In addition the three main global custodian banks were interviewed. They all provide custody services in RMB but act globally so they can serve clients from London without the need to open accounts in RMB in London. T he amount of custody services provided in RMB, however, is not currently significant. Prime brokerage services in RMB 18% of the surveyed banks offer prime brokerage services in RMB. The annual volume for 2011 in RMB prime brokerage services established in the survey was ¥94 billion. Comments on results for custody and prime brokerage services Custody and prime brokerage services are two of the most potentially interesting growth areas for London as an RMB centre. Custody is a very technical and ITintensive banking activity that relies on institutional clients. London is an important platform for these clients and it seems inevitable that, as the yuan becomes more widely used by investors, custodian services will grow. The same applies to prime brokerage services but here there is probably a larger growth potential. The clients of prime brokerage services are the community of hedge and investment funds that need very specific trading services in the whole range of investment and risk management products. As the Chinese economy continues to grow along with the increased availability of RMB investment products, the demand for RMB trading services from hedge and investment funds will increase. Banks in London can serve not only European funds but also, due to their time zone advantage, the many hedge funds on the US East coast and in the Chicago area.
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4
Conclusions
The offshore market in RMB has grown very significantly in the last two years as the Chinese government has relaxed some exchange controls – and made it clear that it intends to do more – and the appetite for the currency outside mainland China has grown. R enminbi-denominated business is growing inside and outside Hong Kong. It is clear that London’s position as the world’s leading international financial centre can add significant value to the Chinese government’s objective to develop the yuan as one of the world’s leading currencies. The report shows for the first time that a broad range of renminbi-denominated products and services are already offered in London. It demonstrates that business generated and/or executed in London is becoming an important part of the global CNH market, cleared through Hong Kong. London therefore has a strong starting point from which to expand its capabilities. Key conclusions from the study are: Deposits In a relatively short period of time, London has built up a significant volume of RMB deposits. Customer deposits amount to ¥35 billion, and institutional and interbank deposits (deposits held by one bank on behalf of another) amount to ¥74 billion. This indicates that a pool of RMB liquidity is being established in London, which will be valuable in developing London as a centre for RMB business and expanding the range of products and services offered in London. London’s strength is in its institutional investor base, and it is anticipated that as corporate and institutional deposits grow, so too will the liquidity of the London market. Retail banking In retail banking a range of RMB services are on offer in London. The number of banks offering personal accounts is still relatively small and the amount deposited in them is not significant. The size of regular RMB personal banking in London is likely to remain less than in Hong Kong given Hong Kong’s closeness to the mainland and the scheme which gives Hong Kong residents a daily allocation for converting other currencies into RMB. The value of private banking accounts is much more substantial, however, with total deposits in excess of ¥3.6 billion - this indicates a significant growth opportunity in London for private banking services in RMB. This would play to London’s strengths as an important base for wealth management services. Corporate banking A full range of RMB corporate banking services are on offer in London, principally focused on forex, corporate accounts and trade financing. There is also substantial growth potential in this segment, as not all institutions offer corporate banking services. As the global CNH market continues to grow and London’s financial institutions understand better the needs of the corporates, more banks can be expected to offer a wider range of corporate products and services in RMB
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including treasury management, supply chain services and debit and overdraft facilities. Institutional and interbank market Interbank and institutional business is the most significant segment of London's current RMB business. This is consistent with London’s position as an international financial centre, with an institutional investor base and a w ide range of market participants from across the globe The report shows that a full range of RMB forex products is actively traded in London. Spot RMB forex trading in London is running at US$ 0.68 billion per day and is estimated to be 26% of the global offshore RMB spot market. T rading in nondeliverable forex products is currently running at significant levels but this business is expected to shift to deliverable products as currency controls are eased. This will considerably boost volumes in spot and other deliverable products. There are signs that this trend may be under way. Overall growth in RMB forex products in London is over 30% per annum. T his indicates that London’s strength as the leading global forex centre is being brought to bear on the RMB market. Future growth The development of renminbi-denominated products and services in London is a relatively recent phenomenon, but the data shows that London’s market share is significant and can be expected to grow strongly. In addition to the products already offered in London, there is an opportunity to build on the City’s strengths as a centre for international bonds and for corporate financing, with a strong expectation that London will become a centre of RMB bond issuance as RMB deposits grow. Custody and prime brokerage services can also be expected to develop as a significant part of the London offer. As the yuan becomes more widely used by investors, banks can be expected to increase their custodian services. Prime brokerage services will also be developed to meet the demand for RMB trading services from hedge and investment funds. London’s global institutions – including those participating in the City of London initiative – are committed to developing London as a centre for renminbi business. Further access to renminbi products and services in the European time zone will make it easier for European corporates to use renminbi for trade settlement purposes, facilitating trade with China and helping to boost growth and benefit European employment. Dealing in Europe, through London, will also allow European companies to maintain a single legal framework reducing their complexity and cost of doing business and helping them to reduce their costs when importing from and exporting to China. London’s prime position as an international financial centre and its growing level of renminbi-denominated business put it in a very good position to be a major player in developing the international RMB market. T here is a strong commitment amongst London’s global institutions to develop London’s renminbi business, in turn facilitating the emergence of the yuan as one of the foremost currencies of the world alongside the US dollar and the euro.
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Annex – Further Details on the Offshore RMB Market A.1
The reasons behind internationalisation
A number of drivers are propelling the Chinese government’s programme of reforms to increase the international use of RMB: a. The 2007 global financial crisis demonstrated the influence of the US dollar on the Chinese economy. Prior to the financial crisis China benefitted from an economic boom resulting from cheap credit in the West. Its export-led economy grew at a very rapid rate: exports grew at nearly 30% p.a. in the four years prior to the crisis. As the business of its importers and exporters grew, the vast majority of the resulting trade flows were denominated in dollars. A negligible amount was denominated in RMB. China built up very substantial reserves in foreign currency, mainly in US dollars. When the global crisis hit and the US responded with a variety of unconventional macroeconomic policy measures, China found not only that its trade business felt the impact of the economic downturn severely but that volatility in the dollar was making life difficult for its importers and exporters and affecting the value of its reserves. The Chinese government concluded that a m ore internationally accepted RMB would reduce the exposure of the Chinese economy to the volatility of the US dollar. b. China wants to boost its position in regional trade. China is the major trading nation in Asia and it is therefore natural for trade with emerging market countries in the region to be denominated in RMB. In the past most of this trade has been denominated in dollars, but settling in RMB rather than dollars helps Chinese exporters and importers to minimize forex risk and reduce transaction costs. It could also, over time, result in South East Asia becoming an “RMB region” where the reference currency for international trade is RMB, a situation which would further add to China’s trade. Hence China has a strong interest in encouraging the use of RMB for regional trade in order to enhance its market position. c. China’s rise to be the second largest economy in the world is not matched by the global status of its currency. Historically, the international acceptability of a currency has been closely related to the country’s economic power. The widespread use of a currency outside the home country is a result of the economic activity related to that country and of the confidence foreigners have in the negotiability and stability of the currency, but it is also a stamp of the country’s economic power. In China’s case the international use of RMB is much below that which could be expected from the currency of the world’s second largest economy. In part this is because China’s currency controls have held it back. China is now seeking to create a global role for RMB commensurate with its global economic
31
importance. It intends its currency to be internationally recognised and used, ultimately to be a reserve currency and part of the Special Drawing Rights basket.
A.2
Offshore RMB initiatives
Hong Kong was initially established as an RMB centre in 2003 when the Hong Kong subsidiary of Bank of China, a mainland commercial bank, was appointed by the PBoC as the clearing bank for RMB in Hong Kong. Bank of China Hong Kong (BoCHK) set up an RMB Settlement System, regulated by the Hong Kong Monetary Authority (HKMA), in 2006. BoCHK acts as a c entral clearing hub, settling RMB between the Hong Kong banks. At first these moves were small experiments focussed on the Special Administrative Regions (SARs) of Hong Kong and Macau supporting the traditionally close trading links between the SARs and the mainland and the needs of the SAR residents to use RMB. Subsequent policy changes have, however, been aimed at facilitating the global trade with mainland China transacted through Hong Kong and the stimulation of a wider range of RMB-related financial services in Hong Kong. From December 2008, in parallel with the initiatives focussed on Hong Kong, China put in place a number of currency swap agreements between the Peoples Bank of China and the central banks of partner trading nations in order to support and encourage the settlement of RMB-denominated trade. Up to February 2012 currency swaps totalling ¥1,446 billion had been agreed with Argentina, Belarus, Hong Kong, Iceland, Indonesia, Kazakhstan, Malaysia, Mongolia, New Zealand, Pakistan, Singapore, South Korea, Thailand, Turkey, UAE and Uzbekistan.
A.3
The People’s Bank of China
The People’s Bank of China (PBoC) is the central bank of China, the issuer of RMB and the controller of the money supply. It has a strong interest in regulating the impact of cross-border flows into and out of mainland China on the domestic economy. It therefore has a central role in many of the regulatory controls on those flows. It also, however, has an interest in reducing the unintended consequences of the country’s large foreign exchange holdings on the economy and so has a s take in encouraging the use of RMB outside mainland China. Apart from its role in applying some of the controls on the cross-border transfer of RMB the PBoC has a direct involvement in the operation of the Hong Kong offshore RMB centre: •
It has a ¥400 billion currency swap agreement with the HKMA to provide emergency liquidity to the RMB Settlement System operated by BoCHK.
•
It operates a f iduciary account scheme for BoCHK which segregates the RMB holdings of the banks participating in the RMB Settlement System from those of the clearing bank (BoCHK).
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A.4
How the Hong Kong offshore RMB centre works
The term “offshore centre” conjures up the idea of a single entity through which RMB is channelled by the Chinese authorities but that is somewhat misleading. The facilitation of RMB business through the financial centre in Hong Kong is achieved by way of a number of diverse elements: i.
Public policy. The Chinese government has made a public declaration that it intends to support Hong Kong in strengthening its role as a financial centre and developing an offshore RMB business centre. This is enshrined in the current five year plan and sets expectations for the financial community.
ii.
Regulations. Certain of the regulations governing cross-border RMBrelated business specifically favour Hong Kong individuals and corporate entities.
iii.
Regulators. HKMA, in its role as regulator of Hong Kong banks, effectively polices some of the cross-border regulations.
iv.
Infrastructure. The RMB Settlement System operated by the BoCHK is particularly designed to clear RMB and is supported by liquidity arrangements between BoCHK, HKMA and PBoC.
v.
Location and history. Hong Kong has long had extensive trading relations with mainland China and is the major regional financial centre outside the mainland. It is a natural hub through which growing cross-border flows of RMB pass.
A.5
The Hong Kong Monetary Authority (HKMA)
The Hong Kong Monetary Authority is Hong Kong’s central banking institution. It carries out the functions of a central bank but also those that in others countries would be managed by the Treasury. The HKMA is also the channel through which many of the regulations governing RMB business in Hong Kong and the flow of RMB across the border with the mainland are policed. The supervisory principles set out by the HKMA for RMB business in Hong Kong are: •
Firstly, that cross-border flows of RMB funds into and out of the mainland should comply with the mainland’s requirements and this would be verified by the relevant mainland authorities and Hong Kong banks; and
•
Secondly, that the Authorized Institutions (AIs) may develop RMB business based on the regulatory requirements and market conditions in Hong Kong provided it does not entail the flow of RMB funds back to the mainland.
The HKMA conducts on-site examinations of the RMB banking business of Hong Kong banks. Additionally the HKMA maintains close contact with the China Banking Regulatory Commission (CBRC) to ensure effective cross-border supervisory cooperation and co-ordination.
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A.6
The flow of RMB from mainland China to Hong Kong and back
Figure A.1 below shows the main cross-border flow mechanisms which increase and decrease the volume of RMB held offshore. RMB flows from the mainland offshore are driven by: • Settlement of RMB-denominated trade imports to the mainland • Conversion of other currencies into RMB by Hong Kong residents who are allowed to convert RMB 20,000 per day • Exchange of foreign currency trade receipts into RMB for trade purposes • RMB Outward Direct Investments Figure A.1 – RMB Flows
RMB flows from offshore back to the mainland are driven by: •
The remittance of RMB denominated bond issuance proceeds, from sales to offshore investors, to the mainland by mainland bond issuers;
•
Investment in the mainland China interbank bond market by foreign banks with RMB holdings;
•
Investments by Hong Kong-based RMB Qualified Foreign Institutional Investors in the mainland securities markets under the volume-limited RQFII scheme;
•
RMB Foreign Direct Investments; and
•
RMB-denominated loans to an onshore enterprise from an offshore parent.
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CITY OF LONDON RENMINBI SERIES City of London Economic Development PO Box 270, Guildhall, London, EC2P 2EJ www.cityoflondon.gov.uk/economicresearch