The emerging global renminbi clearing infrastructure

RMB (renminbi) is poised to broaden its reach and influence as a true global currency. China is establishing its first official Europe-based renminbi clearing bank in London, after a recent visit of the Chinese Premier to the UK. A number of other new locations are set to follow suit. What does this expansion mean for global transaction banks? 

Hong Kong and Singapore are the busiest financial centres able to trade, convert or settle in RMB. By adding London to the official PBOC (People’s Bank of China) approved list, the Chinese government secured access to one of the main international foreign exchange trading hubs.

The addition of Luxembourg will see the second largest global fund management centre (by assets) connected to RMB territories. Germany has one of the largest export-driven economies in the world and the new RMB clearing facilities will enable RMB to tap into the Mittelstand - aof small and medium-size enterprises which accounts for more than a half (52%) of Germany’s economic output. In addition, about a third of the EU exports to mainland China originate from Germany. The new confirmed and proposed RMB clearing locations will strengthen the position of the renminbi as a global currency.

The emerging global RMB clearing infrastructure will enable risk mitigation and direct transfer services with mainland China based corporations, suppliers and customers. The increasing density of this infrastructure could well lead to a new form of competition in RMB capital flows.

Corporates will have direct access to trade with RMB based companies in mainland China or Hong Kong and can avoid using their local banks to conduct the transaction. This will be a lean and local (Europe-based) process that could yield a substantial cost advantage and decrease the Asian payments volume of European and US based financial institutions. The model relies on dedicated settlement banks that are available to receive foreign currency denominated funds directly in Europe, convert them into RMB and settle them against the Chinese National Advances Payments System (CNAPS).

Benefits for corporates
European financial services, manufacturing and trading companies stand to benefit the most from the new setup. They can build closer relationships with a trusted Chinese bank that in turn will lead to more intimate partnerships with their Chinese clientele. Payments and risk mitigation will be more streamlined. Other benefits include faster and easier processing, reduced cost base, better cut-off times to submit transactions and even offshore RMB offerings comparable to Hong Kong’s CNH capabilities. How far these benefits will reach within each company depends mainly on the firm’s technology platform and how well it is connected with domestic markets and infrastructures.

Action call for financial services providers
Current business models of global transaction banks typically involve costly operational setups in Asia that are mainly profitable through cross-selling. The new infrastructure will impact long-term baseline revenues from payments, document handling and trade financing. Transaction banks should re-evaluate their Asian strategies and start looking for international partners, invest in their Asian clearing infrastructure or consider connecting directly to a domestic RMB hub. 

On an international scale the RMB is still an emerging currency (in 7th place, according to the latest SWIFT monitor). However, international swap agreements and credit lines with central banks in around 25 countries already demonstrate potential for further growth. Enabling offshore clearing not only opens the currency to a broader audience but also reduces transaction cost base, when the facilities are backed by the right technology platform.

Finally, the emerging infrastructure will make payments to and from mainland China easier, faster and more accessible, compared with operations run locally in Asia by global transaction banks. Payments are still the backbone of trade finance and tuning in with the globalization of the world’s second largest currency is not something that can be ignored.