An employee counts yuan banknotes at a bank in Beijing. Even as China quickly expands the use of its currency to financial hubs in Asia and Europe this year, bankers are already looking to Canada and Middle East as the next growing regions for their offshore yuan business.
Reuters/Hong Kong
Even as China quickly expands the use of its currency to financial hubs in Asia and Europe this year, bankers are already looking to Canada and Middle East as the next growing regions for their offshore yuan business.
The moves are in line with Beijing’s ambition to promote its currency to more international investors and eventually turn the “redback” into a global reserve currency, while at the same time expanding its already considerable political and economic clout.
“There is big potential in the Middle East and Canada in terms of where’s next for offshore yuan development, and the needs there are quite balanced between trade and investment,” Candy Ho, global head of RMB business development at HSBC told Reuters.
“In the Americas, Canada is a bit ahead of the United States. Canada’s pension funds, especially from the West Coast, are looking to access China,” Ho said.
Indeed, Canada is making efforts to beef up its offshore yuan business. Chinese media reported earlier the government is studying how to set up a yuan clearing centre with the private sector, and hopes to see some progress later this year.
The Canadian province of British Columbia completed its second offshore yuan debt issuance worth 3bn yuan ($490.94mn) on Wednesday, which saw strong demand from central banks.
Issuance from sovereign and supranational issuers is rare in dim sum market and usually draws lots of orders from central banks, which in turn pushes the Chinese currency a step ahead on the road to becoming a global reserve currency.
Some banks are strengthening their presence in China in anticipation that offshore yuan business will take off in the Americas.
“In North America there is an increased focus on transactional banking involving RMB payments. We have hired a head of FX in China which will help us find global RMB FX solutions for our clients,” said Gerrard Katz, head of Asia foreign exchange trading at Scotiabank, Canada’s third largest lender.
And the business interest goes both ways.
Industrial and Commercial Bank of China has won approval to be the yuan clearing bank in Singapore and Luxembourg.
“For the next step, we will try to make breakthroughs in the Americas,” said Wu Bin, general manager at ICBC’s International Banking Department.
By establishing new clearing hubs in more cities, Beijing hopes to persuade more foreign companies settle trade deals in yuan and to switch their invoicing to the yuan, also known as the renminbi. Having clearing banks reduces the cost of making payments, makes trades more efficient and reduces currency risk.
Use of the yuan is also percolating into the Middle East at a quicker pace, with China’s Agricultural Bank selling the first offshore yuan bond in Dubai in September, offering investors there access to yuan assets.
The People’s Bank of China and the Central Bank of UAE signed a 35bn yuan currency swap agreement in 2012 and some Middle East countries have announced or indicated plans to diversify their currency reserves into the yuan.
“The Middle East is looking quite closely at the development of China and access to China. There is evidence of increasing demand for Chinese assets, whether it’s for offshore or onshore bonds given a lot of money there is looking for diversifications,” said HSBC’s Ho.
In June, the yuan reinforced its position as the seventh most active currency for global payments and accounted for 1.55% of payments worldwide.
HSBC expects the yuan to be fully convertible within 2-3 years. It had predicted last year that the currency would become fully convertible within five years.
Meanwhile, China financial institutions are rushing to expand their business beyond Hong Kong, aiming to broaden their investor base to Europe and the United States with yuan products.
Chinese asset managers and banks have long been keen to go abroad, but their overseas business did not really pick up until the past few years when products denominated in yuan began to bestow them competitiveness against strong foreign players.
Asset manager GF International Investment Management told Reuters on Monday in an interview that it was looking to set up offices in New York and London next year to strengthen its distribution ability.
“Our initial plan is to hire five to six people for each office and local hire is preferred especially for sales people,” said Nathan Lin, chief executive officer at GF International Investment.
The firm will cooperate with exchange-traded funds (ETF) provider Global X, which had $3.5bn of assets under management by April, to launch a China bond ETF in New York within a month.
Other money managers including China CSOP Asset Management and E Fund Management have already sold yuan products in Europe or the United States to meet growing demand there.
Despite their smaller size and lack of international investment experience compared with famous foreign names, the Chinese managers are believed to have a better understanding of China’s policies and thus better investment strategies.
“People’s interest in China has increased so much as there are a lot of programs that are telling people that China is definitely opening up,” said Jack Wang, chief marketing officer at CSOP Asset Management.
“We see a lot of new clients coming to us this year, some of whom are very big and reputable foreign investors.”
Not only asset managers, but Chinese banks have begun to see benefits from quicker yuan internationalisation as investors and corporates’ appetite to use and hold the “redback” is whetted by a slew of policies that enable greater access to the world’s second-largest economy.
