The development of the offshore renminbi market (the Chinese currency traded in Hong Kong – CNH) proceeds unabated. Hong Kong, the financial center of this market par excellence, has partnered with the Mainland over the past few years in service of a great purpose: the promotion of a global Chinese currency. The commitment of the Chinese authorities in achieving this goal has led to the expansion of the interbank market, the development of deposits and the diffusion of a series of financial products, still in the process of diversification, denominated in offshore yuan.
Hong Kong has benefited significantly from the business opportunities linked to the CNH market: in fact, according to the estimates promulgated by the Monetary Authority of the cityby the end of January, offshore currency deposits were worth nearly $91 billion, while the sale of Dim Sum bonds (offshore Chinese currency denominated bonds) tripled in 2011, reaching a value of 50.7 billion yuan (nearly USD 8bn).
At the present stage, the increase in the diffusion of CNH-denominated products, the promotion of the use of the renminbi in international payments with China (which last year covered 11% of China's total trade, worth USD 25 billion), the increase in foreign currency deposits, as well as the number of banking institutions authorized to operate in renminbi (currently 134), constitute the set of conditions capable of increasing the liquidity of the offshore yuan market, favoring a diversification of products offered, the associated returns and an extension of the offer of the same on an international scale.
The development of CNH-related business in secondary markets represents an important next step to the current stage of the offshore yuan market, also providing invaluable advantages for the financial centers involved. In the challenge between the main financial centers of the world to propose themselves as a secondary center for the CNH market, competition seems to be limited to Singapore and London.
Many international banks, including the Royal Bank of Scotland and CITIC (China International Trust and Investment Corporation), at the beginning of 2011, had expressed their expectations on the rise of Singapore as the second financial center for CNH, by virtue of some advantages enjoyed by the city-state. Singapore is distinguished not only by its excellent financial infrastructure, which makes it the second largest stock exchange in Asia (after Tokyo) and which would favor the development and diffusion of the offshore renminbi, but also due to the close commercial and cultural ties it maintains with China. Demonstrative of this relationship, is the agreement for the establishment of a swap line worth 150 billion yuan (USD 22.8bn), contracted directly with the People's Bank of China: this swap agreement stands out for being the third largest by amount (after Hong Kong and South Korea), but the first in proportion to Singapore's share of total trade China's trade with Asia.
However, although Singapore seemed to be the favorite until the beginning of last year, the development of the CNH market during 2011 and the recent official support of Beijing in London now seem to turn the spotlight on the City. According to data collected by Swift (Society for Worldwide Interbank Financial Telecommunication), London's share of payments made in yuan outside Hong Kong and China increased in 2011 from 22.1% in the first quarter to 30.1% in the last quarter of the yearl. In fact, Singapore was penalized by London's success, which in the same period saw a decrease in its share from 52.9% at the beginning of the year to 30.6% in the last quarter.
Another point in favor was also the support publicly expressed by Beijing towards London: following the meeting, in September 2011, between the Chancellor of the Exchequer George Osborne and the Chinese deputy premier Wang Qishan, in January of this year , the Hong Kong Monetary Authority and the UK Treasury have jointly announced the launch of a forum aimed at the private sector, the function of which is to facilitate cooperation between London and Hong Kong in the promotion of business associated with CNH. The task force is composed internally of representatives of the major financial institutions of the two cities, including HSBC, Bank of China, Deutsche Bank, Barclays and Standard Chartered. For the discussion of the main issues relating to the CNH market within the forum, two meetings are scheduled a year, the first of which will be held in Hong Kong next May. The topics on which the forum is expected to focus on this occasion include: the study of financial products denominated in CNH, the promotion of greater liquidity of the renminbi market and the development of systems for the settlement and clearing of payments made through the use of the Chinese currency.
Among other measures taken to facilitate the development of the offshore renminbi market in the City, Hong Kong also announced the decision to extend the operating hours of its system for real-time settlement in renminbi to 15 hours a day starting from the end of June (from 8.30 to 23.30 Hong Kong time), thus agreeing to British financial institutions the possibility of having a large enough window to manage payments in CNH through the use of the Hong Kong platform.
The City's involvement in the offshore yuan market would be beneficial for both parties. The possibility of relying on the British market, the largest financial center in the world, would satisfy China's need to make use of the know-how, structures and skills it lacks, simultaneously extending the offshore renminbi market in Europe and laying the foundations for a 'further spread of the Chinese currency. On the other hand, estimated profits for the City would exceed £XNUMX billion, as well as gains in prestige and reputation as the only center for CNH outside Asia.
However, there are obstacles to the arrival of the Chinese currency in the City: Although Beijing's support in promoting London as the second largest financial center for CNH has been interpreted by many as a signal towards greater easing of controls on capital flows and the value of the renminbi, this currency is still relatively new among investors of the City. Among the difficulties associated with this collaborative project, in addition to the need to establish a swap line in Chinese currency between the two countries and the problems due to not full convertibility of the renminbi, the question of the small size of the business associated with CNH is added, which could lead to a certain distrust on the part of European investors, motivated by the possibility of risks such as, for example, the uncertainty about the sufficient liquidity of the market.
