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The offshore RMB market’s future? |
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. London and Frankfurt will also gain clearing capabilities soon.
An Americas hub might be next, while Kenya, the United Arab Emirates and Brazil have similar ambitions. But a growing number of cities with offshore renminbi infrastructure may lead to fragmentation.
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 offshore markets are actually connected so that they function as one global 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.
Timing
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 Linklaters. He 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," said Malcolm.
What's next
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.
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"Issues are bound to come up, especially between Hong Kong and London"Andrew Malcolm, Linklaters |
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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 developments.
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.
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.