It comes as some surprise the United Kingdom has overtaken Singapore in second place, though is still way behind Hong Kong. This reflects the growing use of the RMB as a payment currency between the UK and Greater China.
London is also the largest FX trading centre in the world with average daily turnover exceeding $US2.2 trillion (37 per cent market share), according to theBank of England’s Semi-Annual FX Turnover Survey and the Bank for International Settlements Triennial FX Survey, both conducted in April 2016. It is perhaps not surprising to see London moving up the charts with a bullet and this should continue.
Despite moving into third place, Singapore remains a key centre as well. As a key location for regional treasury centres, it is also a leading hub for commodity trade being strategically placed in Southeast Asia’s shipping routes.
Singapore also has strong trade and investment flows with China and the third largest RMB deposit base (RMB142 billion) outside of China making it a logical place to build and develop RMB products and services for the offshore market.
Also, as the third largest foreign exchange trading centre behind the United Kingdom and United States, Singapore has a critical role to play in providing offshore RMB liquidity and risk management services to the region.
As a centre for RMB, Taiwan already boasts a pool of RMB deposits totalling RMB306 billion, a liquidity pool second only to Hong Kong which has RMB712 billion (balances as at the end of June 2016).
Despite a complicated relationship and a yet to be finalised Cross Strait Service Trade Pact, a strong trade and investment relationship has continued to thrive between China and Taiwan.
This relationship has been key to building Taiwan’s RMB presence however for the most part, Taiwan appears more standalone and less connected to the rest of the larger RMB financial centres.
Australia has also tried to take the bull by the horns and promote itself as a key RMB centre in the Asian region. Building a RMB clearing system which plugs directly into China (a unique development for an offshore centre) and developing capability to issue, settle and hold RMB denominated securities has positioned Australia well for RMB to become a larger part of Australia’s relationship with China.
Australia already has strong trade relations with China and been a growing source of inbound direct investment so its development as a RMB clearing hub is no surprise.
A trade relationship dominated by $US priced commodities however, has seen a slow take up in RMB payments and deposits from Australia to date, however this should change given time.
REST OF THE WORLD
Other markets such as South Korea and Canada again rely on strong trade and investment relationships to build their RMB flows and liquidity although to date, these still remain modest.
Interestingly, the Republic of Korea and the Province of British Colombia have both issued sovereign RMB denominated Panda bonds into China’s onshore bond market to demonstrate commitment to their respective countries’ efforts to assist with internationalising the yuan.
Strong public and private sector support in both of these countries remains vital to growing their share of the RMB pie.
Perhaps the most interesting development has been the recent inclusion of the United States as an offshore RMB clearing centre and the formation of The Working Group on US RMB Trading and Clearing.
The United States was previously conspicuous by its absence (though not surprisingly so) but it has now certainly emerged with a bang, receiving the second largest RQFII allocation from the PBoC of all countries (RMB250 billion) behind Hong Kong (RMB270 billion).
As a global financial behemoth and home to a significant number of investors and multi-national corporates, the United States should have a key role to play in the development of the RMB. To date, RMB internationalisation has not been a high priority for the United States given the rarefied position that the $US enjoys as the world’s completely dominant reserve, investment and trade currency.
This stance appears to be softening and the United States will be very important to RMB development not just for North America, but for the rest of the world as well.
While China has given great focus to building offshore centres, it has also pressed forward with measures to make the yuan more convertible and has also built cross-border RMB payment infrastructure (Cross-border Interbank Payment System, or CIPS).
Such developments are clearly aimed at making it easier and more efficient for foreigners to deal directly with China rather than needing to be intermediated through an offshore hub. While these developments are no doubt critical they will potentially see over time the importance of offshore centres diminish.
How each centre evolves as China becomes more liberal and direct access becomes the norm will depend on what each centre brings to the table. London and New York are likely to remain the world’s key foreign exchange trading centres so will be a natural magnet for RMB trading.
Other centres will need to work out how they will best fit in as China’s new world order continues to emerge.
Daniel Everett is Global Head of RMB, Strategy & Execution at ANZ