On China’s long march towards the full convertibility of its currency, the designation of Hong Kong as an offshore financial centre for the renminbi in 2009 was a key step.
Now Beijing has signalled its choice of the next location for its experiment, as part of what many assume will be the ultimate globalisation of its currency. Singapore has edged ahead of London after Beijing this month said it would authorise one of its banks as a clearing bank for renminbi in the city-state.
That would enable Singapore-based banks – including branches of foreign banks such as Standard Chartered and Citi – to skirt the multiple custodial relationships with their peers in Hong Kong to access the currency at Bank of China’s branch, the sole designated offshore clearing bank.
A decision is expected soon on which bank will get the nod, with Bank of China and Industrial & Commercial Bank of China, two of China’s biggest state-run lenders, seen as frontrunners.
In theory, the move could cut costs for banks, making Singapore a more attractive place to do business in renminbi. Not only will it create a pool of renminbi liquidity in Singapore but it should also make it easier for banks there to service clients “without having to rely on a competing financial centre”, says Dariusz Kowalczyk, senior economist at Crédit Agricole.
Analysts are agreed that Hong Kong will probably remain the undisputed dominant offshore renminbi centre. As Deutsche Bank notes, the city has become the “pricing centre” for offshore renminbi products, with the setting of offshore renminbi exchange rates and bond yields almost wholly based there. Singapore’s trade with China is a third that of Hong Kong’s.
Yet Singapore stands a good chance of becoming the regional hub for providing renminbi services to south-east Asia, with which it shares far more trade links than does Hong Kong.
About 55 per cent of Singapore’s external trade is intra-Asian, compared with about 20 per cent for Hong Kong, according to Royal Bank of Scotland.
The move could also allow greater financing of trade flows through Singapore. Linan Liu, Greater China rates strategist at Deutsche Bank, says it could “open the door to more south-east Asian corporates using the renminbi as a funding currency”.
As of May, 6.8 per cent of China’s trade transactions was settled in renminbi, says Crédit Agricole, up from 0.2 per cent in December 2009. Banks in Singapore are seeing a rise in demand for lending, albeit not much in renminbi, from Chinese companies looking for new markets as the mainland’s economy slows.
United Overseas Bank, one of Singapore’s largest banks, has seen a sixfold increase in loans to subsidiaries of Chinese companies operating in south-east Asia since October. John Kong, UOB’s head of cash management and trade services, says having a renminbi clearing bank in Singapore would have benefits beyond simplifying settlement.
“It would make renminbi more accessible, [creating] a liquidity pool for renminbi that could be the basis for the creation of renminbi products, even for the man in the street,” he says.
Only a small amount of China’s currency is held outside the mainland because Beijing tightly restricts cross-border renminbi flows. The Hong Kong Monetary Authority says about Rmb554bn, less than 1 per cent of the deposit base on the mainland, is held in Hong Kong, while Rmb60bn is held in Singapore, according to the Monetary Authority of Singapore.
The Singapore Exchange, anticipating wider use of the Chinese currency in the city-state, has said it stands ready to list, trade, clear and settle securities denominated in renminbi. SGX lists offshore renminbi bonds and offers the clearing of over-the-counter foreign exchange forward contracts in renminbi.
The question is how big a clearing line Beijing will give to Singapore. The Bank of China Hong Kong’s line is Rmb8bn, considered small compared to the size of the renminbi spot and forward currency markets, estimated at $5bn-$6bn.
“As long as they give a reasonable size to Singapore it will give Hong Kong a run for its money,” says Woon Khien Chia, head of local markets strategy for emerging Asia at RBS.