Rising trend of renminbi financing set to expand beyond Asia

Out-Law News | 02 Jul 2014 | 10:20 am | 2 min. read

The renminbi (RMB) is now the second most used currency for cross-border payments with China and Hong Kong, and its use is expected to spread to other major international financial centres, according to a survey by data provider Swift.

Swift’s ‘RMB Tracker’ said that 12% of cross-border payments with China and Hong Kong in May 2014 were made using the RMB, an increase of 36% from one year ago. The US dollar remained in the top position, with the Hong Kong dollar following close behind the RMB for payments to China and Hong Kong.

Swift’s chief executive officer for Asia Pacific, Europe, the Middle East and Africa Alain Raes said: “Hong Kong has the most-established and largest RMB corridor with mainland China, but as other financial centres, such as London, Singapore and Frankfurt, establish the necessary infrastructure and agreements to support RMB transactions, we will see the RMB grow significantly in these markets.”

Raes said: “Creating these hubs in Frankfurt and London to support RMB trading will promote greater use of the currency for global trade and finance across the region. As the use of the RMB grows, we expect more market centres to take notice of the RMB as a world payments currency.”

Swift’s latest report followed two recent announcements related to RMB clearing in Europe. In June, the London branch of the China Construction Bank was named as the clearing bank for offshore RMB in London. On the same day, the Frankfurt branch of the Bank of China became the first institution in the Eurozone allowed to clear payments in the RMB, Swift said. The Bank of China is also the clearing bank for the RMB in Hong Kong, Macau and Taipei, while the mandate in Singapore belongs to the Industrial & Commercial Bank of China Ltd.

Launched in September 2011, the SWIFT RMB Tracker provides monthly reporting on key statistics to follow the progress made by the RMB towards becoming an international currency.

Swift said the RMB held its position overall as the seventh most used global payments currency in May 2014 and accounted for 1.47% of global payments, up from 1.43% the previous month. “At a global level, all currencies decreased in value by 0.7% in the same month,” Swift said.

Hong Kong-based technology law specialist Peter Bullock of Pinsent Masons, the law firm behind Out-Law.com, said: “RMB financing has become much more prevalent in the last 24 months following the opening of various offshore centres for RMB exchange. Hong Kong has hoped to keep a significant share of this business but will inevitably lose market share as time goes by. A particular factor is the Shanghai Free Trade Zone, in which RMB exchange is being encouraged. That said, Hong Kong is well placed to be involved in new forms of RMB finance and the growing overall China trade means the full market potential is enormous.”

A working paper published in May 2012 by the International Monetary Fund (IMF) (36-page / 1.40 MB PDF) said: “Among emerging market currencies, the RMB holds the most potential to become widely used internationally, due to China’s large economic size, diversified trade structure and network, macroeconomic stability, and high growth rates, both current and expected.”

The paper said efforts to encourage cross-border use of the RMB “picked up speed in the aftermath of the global financial crisis”.

The IMF paper said: “In general, currency internationalisation could provide a number of advantages to the country of issuance. Particularly, it would reduce exchange rate risk facing economic agents and allow both the public and private sectors to issue debt in domestic currency internationally, thereby improving risk management of cross-border transactions and reducing liquidity and exchange rate risks facing domestic firms.”