As international financial centres compete for the status of
offshore renminbi hub, some
market participants fear a rise of transaction risk due to the
currency’s lack of a natural home.
Trades between two US dollar-denominated accounts are
cleared in New York while onshore renminbi trades are cleared
via the China National Advanced Payment System. But offshore
renminbi can be cleared in Hong Kong, Taiwan and Singapore,
with London and Frankfurt to gain clearing capabilities
An Americas hub might be next, while
United Arab Emirates and
Brazil are also vying to become offshore renminbi hubs. But
the number of hubs involved in the offshore
renminbi’s market infrastructure may lead to
Patrick Pang, head of fixed income and compliance at the
Asia Securities Industry and Financial Markets Association
(Asifma), emphasised the importance of ensuring that
all the offshore markets are actually connected so that
they function as one global offshore renminbi market.
Speaking at a press conference for Asifma’s
Renminbi Roadmap, Pang argued that while other currencies
all have a natural home jurisdiction in which to be cleared,
the offshore renminbi does not. "It lacks its own home clearing
base, which gives rise to a number of peculiarities which the
industry should remain alert to," he said.
- The offshore renminbi is unusual in that it is
not cleared in China, but in Hong Kong, Taiwan and Singapore.
London and Frankfurt are also expected to add clearing
- Some fear that the number of offshore renminbi
clearing hubs could contribute to market
- Market participants agree that an international
payment system would be the ultimate solution to any
Offshore renminbi clearing banks cannot settle between
themselves directly. Doing so would require an onshore
settlement with the People’s Bank of China (PBoC).
Instead two settlements are necessary to transfer offshore
renminbi from one pool to another.
"Practically speaking, that introduces timing issues," said
Andrew Malcolm, partner and head of Asia capital markets at
Malcolm explained that both offshore renminbi centres must
be open to complete a settlement. That’s different
from other currencies: for example, trades between two US
dollar-denominated accounts anywhere in the world can be
settled in New York.
The offshore renminbi’s clearing process is
different because it has a number of clearing centres. If a
party planned to transfer offshore renminbi between the London
and Hong Kong pools, both centres would have to be open.
This won’t be an issue unless more clearing
centres are added. "Once the number of hubs increases to five
to seven centres, it would draw settlement out over the course
of a day around the world, and that introduces extra
transaction risk," he commented.
Other concerns centre on currency disruption. Dim sum bonds
currently include provisions stipulating that if
there’s a problem settling in CNH, they can be
settled in US dollars – that problem might be
illiquidity or illegality. Both are specified in reference to
Questions about how new renminbi centres might affect this
arrangement remain unresolved. Malcolm posed a few: "In the
future, if the issue only affects Hong Kong, should the London
market be used? Should it be stipulated that dim sum bonds can
only be settled in US dollars if an issue affects every single
Malcolm said that clearing across renminbi hubs has not yet
become a transaction risk. That’s probably because
Hong Kong is a larger clearing centre than Taiwan and Singapore
This will need to be looked at quite closely once London
begins clearing trades because it’s such a large
centre for foreign exchange and eurobonds. He said, "Issues are
bound to come up, especially between Hong Kong and London."
Malcolm is starting to consider potential solutions.
"It’s not a burning issue yet, but will be
increasingly important in the next 12 months or so."
It’s widely agreed that the ultimate solution
would be a common clearing network such as the
China International Payment Platform (CIPS), which was
announced by the (PBoC) in April 2012. It was
previously reported that CIPS would be established in
Shanghai this year although there have been few recent
"The bigger threat to Hong
Kong is probably not the other offshore centres, but
the onshore market developing"
CIPS would restore the PRC’s sovereign risk to
the currency, which would be a big step in ensuring the
fungibility of the market, said Pang.
Hong Kong will likely remain a market centre although its
share of the renminbi clearing business is declining as it
faces competition from other hubs. Asifma chief executive Mark
Austen said that the pie is growing, and therefore Hong Kong is
growing overall. He expected that it will be the dominant
centre going forward, provided that there is interoperability
in the offshore centres.
But an alternative view is that an offshore renminbi hub may
not be needed at all. Pang pointed out that as the market
liberalises and China’s capital markets open up,
onshore and offshore renminbi will continue to diverge
– to the point where the offshore hubs might not be
needed at all.
Austen agreed: "The bigger threat to Hong Kong is probably
not the other offshore centres, but the onshore market
developing," he said.
That isn’t likely to happen until the rule of
law develops further and foreigners are able to access the
market with limited administrative hurdles.
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