RMB internationalization and the Canadian hub: what to expect

Caifu Magazine | by Caifu Global

The world’s largest banks believe that the use of RMB as a trading, investment and reserve currency will continue to grow. By 2015, RMB trade settlement will have surged, particularly among its main trading partners. The redback’s role in global trade cycle should also be reinforced. By 2020, the RMB should be prevalent in finance and be fully convertible.

The position among Chinese banks is that the internationalization of the RMB affords China a unique chance to make history and take a position of leadership on an international stage. Banks that have released statements on the subject – namely BOC, ICBC, Agricultural Bank and HSBC – have identified the RMB’s stability in the face of both the 1997 and 2008 financial crises as its chief attraction for commercial actors. This enables the RMB to potentially act both a stabilizing mechanism from the global financial system and as safe harbour from exchange risk. As such, BOC is hopeful that the internationalization of RMB will lead the international financial system toward a historic paradigm shift away from the use of a single national currency as reserve currency.The Triffin Paradox resulting from this situation had been named by the PBoC in 2009 as the root cause of the 2008 crisis, months before China launched its pilot program for cross-border RMB trade settlement. In addition, according to HSBC, a second major reason why businesses adopt RMB settlement is the pressure to do so from business partners.

The BOC considers commercial banking to be a major driving force behind RMB internationalization. According to the CEO of the BOC, Tian Liguo, the following are the actions that banks must take to support the internationalization process:


    1. To provide RMB products and services well-suited to the needs of clients inside and outside China, in order to increase the use of RMB in cross-border trade and offshore investment; to deepen relationships with importers, exporters, and global clearing houses in order to promote RMB clearing and settlement for bulk transactions.


    1. To promote the development of an infrastructure to support offshore RMB markets, with a view toward establishing a global network of RMB clearing activity.


    1. To continually create new offshore RMB financing products; to foster the markets for foreign exchange, bonds-issue and investment; to promote the deepening of financial markets in order so that the RMB becomes an actively exchanged currency in various offshore markets and so that offshore markets become sustainable carriers of RMB; to utilize market forces to gradually close the distance between onshore and offshore markets.


    1. To foster a more reasonable RMB pricing system and mechanism, and provide clients with effective strategies to manage liquidity and exchange risk.


The BOC also asserts that it is willing to utilize existing global clearing and trade systems in order to open a path for the RMB toward offshore clearing. For the most part, banks are optimistic that the renminbi will gain increasingly wide acceptance and that the internationalization process it embarked on will not be reversed. In particular, more than 70% clients surveyed by HSBC indicated that they believed that RMB transactions in their industry will grow in the next five years, with 27% predicting that it will grow by more than 20%. In the case of Canada, BOC notes that RMB business volume through BOCC doubled each year since its inception, balancing out concerns that the volume of RMB transactions in Canada is lower than that of many other countries. However, the Agricultural Bank of China identified capital controls and a weak financial market in China as potential obstacles to RMB internationalization. Banks will need to begin offering a greater number and diversity of offshore RMB products to create a network that will support the internationalization of the currency. Additionally, there are financial commentators in China who warn that lifting capital controls can result in RMB losing its stability and relative lack of exchange risk, the qualities that made the redback an attractive international currency in the first place.

By 2017-2020, China is expected to have lifted capital control. This could signal that offshore hubs will no longer be needed in the future to clear transactions and that their role will be replaced by the China International Payments System (CIPS), which was established in Shanghai in 2014. Nevertheless, the global race for offshore RMB hubs will remain an active one as hubs play an instrumental role in helping the RMB’s internationalization to take off, bringing the international financial system closer to having stability and alternative to the U.S. dollar. With government officials in France, Switzerland and other countries also starting to meet with representatives from China’s central bank, it remains to be seen how Canada will engage in its upcoming talks, how it will proceed with first-steps such as a swap agreement and direct trading, as well as how market actors will respond to the increasing significance and availability of the RMB settlement opportunities worldwide. In the long run, given Canada's financial expertise, Canada could begin to offer RMB investment tools such dim sum bonds and derivatives, this time listing the bonds on Canadian exchanges rather than in Luxembourg. It could also launch initial public offerings (IPOs) of Chinese companies.