Magazine issues » Summer 2012

INSIDE VIEW: In search of the next big offshore centre

RensHaving been involved in key pilot schemes to test the world’s appetite to use renminbi, Hong Kong has first-mover advantage. But who is competing for second place? Swift’s Lisa O’Connor takes a look.

The cross-border use of the renminbi is growing because of the global importance of China as a trading partner.

Statistics released by the World Trade Organisation last year show China now has more than 11% of global trade by value. Trade is typically a driver for the international use of a currency.

While China dominates as a global trading partner, the majority of the merchandised trade is still settled in dollar, not renminbi. Using the value of customer-initiated payments as a proxy for imports and exports, Swift is able to evaluate the percentage of trade that is settled in this currency.

For imports, or payments sent, 1.7% of the trade for China and Hong Kong were settled in renminbi last year. This compares with 83% in dollar. For exports, or payments received, 2.5% were settled in renminbi. This compares with 79% in dollar.

The future growth of the renminbi will be directly related to the Chinese government policy changes.

In March, the People’s Bank of China announced it would extend the policy on cross-border renminbi payments beyond the 67,000 exporters that were included in the Mainland Designated Enterprises (MDE) list.

Now all licensed import and exporters will be allowed to settle in renminbi with companies outside China, unless the mainland company appears on the “enterprises under close supervision” list. This replaces the MDE list.

Settlement of transactions in renminbi should grow since almost all companies in China are eligible to accept renminbi payments. Although trade settlement in renminbi is still very small, international use is growing rapidly; its growth has outpaced all other global currencies in last year.

The Chinese currency grew at a compound monthly rate of 14.8% versus an average of 0.7% for all other currencies. The figure is striking, especially when compared with the growth rate of Brazil, Russia and India.

Over the same period, the Russian ruble grew by 7.4%, the Indian rupee by 4.1% and the Brazilian real by 2.3%.

Key trends
Hong Kong is the world’s biggest renminbi offshore centre, with 78% of all renminbi payments sent and received.

Swift recently analysed the payments value excluding Hong Kong and mainland China to determine whether the use of renminbi outside the primary offshore centre, Hong Kong, was increasing or decreasing.

One of the key trends noticed was that in the fourth quarter of last year, London already represented 30% of renminbi payments value, thus levelling it with SingaporeIn the first quarter of this year, the proportion of payments by London has decreased to around 25% of the value, excluding Hong Kong and China.

The payments for Singapore have decreased, although its value is marginally higher than that of London. On the payment value, Singapore and London are expected to track closely to one another.

Looking at the annual growth, however, we can determine that Singapore and the rest of the member states of the Association of Southeast Asian Nations (Asean) continue to be a very important driver for the cross-border use of the renminbi.

Comparing the payments growth in Singapore and Asean  countries for the same quarter a year prior, it grew an impressive 1,353% versus London and the rest of Europe, that saw growth of 700%.

We also evaluated the foreign exchange confirmation volume, excluding Hong Kong and mainland China, and London was already representing 46% of the remainder of the renminbi foreign exchange confirmation volume.

Global use
It is interesting to look at the numbers for the first quarter of this year and the first quarter of last year. Foreign exchange confirmation volume growth for Singapore and Asean together was 71%, while that for London and other parts of Europe was 114%.

Asean is China’s third largest trading partner and is an important influence on the increasing cross-border use of the renminbi. Singapore has 73 of the 1,023 global financial service firms transacting in renminbi.

Pilot scheme
Measured in payments value, Singapore and Asean together represent the highest value of cross-border renminbi payments, excluding China and Hong Kong. When looking at the foreign exchange confirmation, London and the rest of Europe are growing at a faster rate than that of Singapore and Asean.

Hong Kong still has a first-mover advantage because it was the first offshore centre to be involved in key pilots to test the world’s appetite to use reminbi. 

In the near term, Hong Kong will remain in this position since the majority of all payments are processed by the Bank of China clearing bank code.

The news surrounding the creation of a new cross-border payment system by the People’s Bank of China has the potential to shift some volume but, overall, this advancement in their payment market infrastructure should increase the global use of the currency.

Lisa O’Connor is a director, renminbi internationalisation, Asia Pacific, at Swift

©2012 funds global

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