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October 29, 2013 9:16 pm
For a currency that is still largely controlled by the state and grants its holders few investment options, the renminbi has attracted a remarkably large band of suitors around the world.
London, Luxembourg, Paris, Frankfurt and Zurich have all styled themselves as the rightful European trading centre of the Chinese currency. Vying for the Asian crown are Hong Kong, Singapore, Taipei and Sydney.
With practised skill, Beijing has made each of the renminbi’s suitors feel special in turn. In the past month alone, the Chinese central bank established a Rmb350bn ($57.5bn) currency swap line with the European Central Bank, granted London an Rmb80bn quota for investing the city’s renminbi assets in Chinese markets and then awarded Singapore a similar, if slightly smaller, Rmb50bn package.
So which cities are actually going to make it as the global centre of renminbi trading? And does it really even matter?
“The more places you can trade renminbi the better. It will enable this currency to be used much more widely,” says Paul Mackel, head of Asian currency research at HSBC. “What you need to see is the offshore liquidity pool increase.”
Indeed, looking at the overall pool of renminbi held beyond China’s borders, it is clear that the excitement about the new would-be trading centres has run far ahead of the financial reality.
Hong Kong, the undisputed champion of overseas renminbi trading for now, saw a surge in deposits of the Chinese currency when Beijing first allowed the renminbi to flow abroad. Renminbi holdings shot up from 1 per cent of overall deposits in Hong Kong in late 2009 to 10 per cent by mid-2011.
But since then, the limitations on what can be done with the currency have held it back – the renminbi pool in Hong Kong has stagnated at the 10 per cent threshold over the past two years.
In the other putative international renminbi trading centres, growth of deposits, bond issuance and derivative trading have appeared strong, but they have always come from a tiny base. Calculations show that renminbi holdings account for just about 5 per cent of banking deposits in Singapore, a little more than 1 per cent in Taipei and a vanishingly small 0.4 per cent in London.
Whipping up enthusiasm for the renminbi in so many different countries appears to be a deliberate part of China’s strategy for spreading its currency around the globe. “Rather than focus on Hong Kong, we do see it as a policy initiative to roll it out to different financial centres,” says Liu Ligang, an economist with ANZ. “At this point it’s more diplomacy than real finance.”
Notable by its absence from the parade of cities touting their renminbi credentials is New York.
“There may be some currency competition at play, with the US worried about challenging the dollar. The US government has not been like Europe in focusing on the renminbi,” says Zhang Ming, an economist with the Chinese Academy of Social Sciences.
But with Beijing month after month persuading bigger and more developed markets to hop on the renminbi train, many analysts think it is now only a matter of when, not if, the US will come aboard, too. “As the renminbi develops in other centres, New York will sooner or later have to join the internationalisation process,” Mr Zhang says.
Jack Chang, chief executive of ICBC Asia Asset Management says that global financial centres should not see themselves in competition, as any loosening of capital controls by Beijing will only come once the combined pool of renminbi around the world reaches a certain size.
“You need multiple centres that are working together to build up [renminbi] liquidity outside China,” he says.
Nevertheless, before China frees up the renminbi by loosening capital controls, it seems inevitable that financial centres will continue to jostle for a bigger share of the Chinese currency’s global business.
In that vein, a senior European diplomat based in Beijing bemoaned Britain’s recent move to encourage Chinese banks to expand their London operations by relaxing their capital requirements.
“What we are seeing is regulatory arbitrage, and that is not the best thing,” he said. “Ultimately, we all have to wait for China to lift capital controls. When that happens, may the best city win.”
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