Treasury Today Country Profiles in association with Citi

Redback gaining a foothold in Europe

Renminbi underneath abacus

European corporates are embracing the renminbi in ever greater numbers, according to the latest results of SWIFT’s RMB Tracker.

There’s no doubt that the Chinese renminbi is on its way to being a major global currency. While the authorities in Beijing continue to liberalise, bit by bit, the regulation controlling the flow of renminbi in and out of the country, Europe’s share of trade in the currency is growing at a pace.

According to data recently from the global transaction services organisation SWIFT, Europe now represents 10% of RMB payments worldwide in value. Clearly, RMB is becoming increasingly important: both to China’s international trade ambitions and the rest of the world’s trade ambitions with China. The growing expectation is that the currency will one day soon be able to attain the status, currently enjoyed by the US dollar, as the world’s reserve currency.

However, there are a number of things that the renminbi still lacks compared with other major currencies such as the dollar, not least a quality payments infrastructure.

Progress towards this end is being made, however. This is particularly true in the case of the developments we have seen in the four European countries – the UK, France, Germany and Luxembourg – that SWIFT says have joined the top ten locations involved in RMB transactions (excluding China and Hong Kong) in the past year. RMB use has risen the fastest in the United Kingdom, with 123.6% growth between July 2013 and July 2014, followed by Germany (+116%), France (+43.5%) and, lastly, Luxembourg (+41.9%).

During the previous 12 months, each of these four countries received approval from the People’s Bank of China (PBoC), to establish offshore clearing centres to facilitate the use of RMB transactions. Dedicated clearing banks have been designated for UK and Germany, and in France and Luxembourg PBOC have signed RMB Clearing Memorandums of Understanding. Each of the new clearing locations has, of course, their own well-established trade links with China and, as such, one would expect use of renminbi to grow in these countries anyway as the regulations around the currency continue to be loosened.

But the four European clearing hubs, designed to improve the efficiency around the use of renminbi outside of mainland China, have certainly provided a boost. “Many of these locations are centres and hubs of international finance,” says Michael Moon, Head of Payments and RMB, Asia Pacific at SWIFT. “So I think the growth (in RMB uptake in the four countries) is a reflection of the relationships that these markets have with China, in addition to some reinforcement to the offshore RMB through the establishment of the hubs.”

A truly offshore RMB

One of the interesting findings highlighted in the SWIFT press release is the fact that, in Luxembourg, there has been an increasing share of transactions that have not involved parties in mainland China. These transactions are what Moon calls ‘truly offshore flows’, something he reminds us is a key characteristic of authentically global currencies.

Does SWIFT believe this is something we will see more of in the years ahead? “I think we will,” says Moon. “If you look at the US dollar or the euro, they are international currencies commonly transacted outside of their own markets.” Although it is still early days in Europe, Moon says this type of transaction is becoming increasingly commonplace in some Asian countries. “There is more and more RMB being moved around in places like Singapore, for example, that doesn’t involve China. I think there is a progression, from domestic transactions, to cross-border truly offshore flows that remain outside of China. And I think we are beginning to see a bit of that now.”

Surplus to requirements?

The offshore hubs may well be helping to advance RMB’s use as a trade currency in the present, but do they have a future over the longer term? After all, we expect to see in the very near future the roll-out of a new international clearing and payment system in China, known as the China International Payment System (CIPS), which will be fully integrated with the onshore market and allow for payments, using international standards, with the capability to execute across 17 different time zones simultaneously. As such, some observers are questioning whether clearing banks in Europe will still be needed after CIPS becomes operational.

Moon has a different perspective, however. “In international payments and transactions the role of common global standards is very important in supporting the development of the RMB currency internationally. But CIPS doesn’t necessarily take away the need for having some of the offshore centres as well,” he says. That is because each of the markets in which offshore clearing hubs have been established has its own specialisations that he thinks will continue to attract a share of the global renminbi business.

Singapore, for example, seems like a natural hub for South East Asia. France, similarly, is an important player in a number of the African markets that have become valuable trading partners of China’s in recent years. There will also be opportunities, he adds, to get involved in different types of transactions – such as securities – besides plain vanilla payments. “That way they can move up the value chain as well. There is plenty of room in the RMB market for different types of services and infrastructure.”