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FX VOICE: RMB direct conversion and the future of CIPS

Oct 28, 2013 | By |

The UK and China have agreed to establish direct conversion of the pound and renminbi, while the euro and renminbi may not be far off. In terms of trade settlement, what is the potential impact of this development? CT asks the experts.

Sunil Bhatia, head of clearing and FX products, APAC, Bank of America Merrill Lynch (pictured):
In June, a reciprocal three-year, Rmb200 billion pound/renminbi currency swap line was established with the Bank of England — the first with a G7 country. The swap is a natural step in the process to enable London as the renminbi offshore centre in Europe, but the establishment of a renminbi clearing system in the UK is still off the table, which will be to Hong Kong’s benefit.
The swap line is designed to promote bilateral trade between the UK and China and to support financial stability should market conditions warrant. Currently more than 90% of renminbi payments from London are related to institutional transactions. This suggests that London is more of a trading hub. However, the swap lines create a degree of confidence in renminbi liquidity, which is likely to be accentuated by the recent announcement establishing direct conversion between the pound and the renminbi.  
With the regulations now permitting overseas investments in China’s onshore bond and equity market, there is potential scope for financial institutions to begin offering additional products and investment options… [which] will in-turn potentially incentivise use of renminbi trade settlement in the UK. This build-up usually takes some time and will not happen overnight.
Another consideration for the adoption of renminbi globally is the China International Payment System (CIPS). CIPS is likely to be developed with the intention of facilitating cross-border renminbi clearance among market players. The goal of CIPS will be largely to simplify and standardise clearing processes for foreign entities. We believe this will inevitably lead to a better understanding of the regulations governing renminbi and therefore provide more efficient execution of cross-border payments and settlements. However, at this stage it is still too early to speculate on its potential impact on clients, its launch date or the technical aspects surrounding it.

Janet Ming, head of London China desk, RBS:
The agreement between China and the UK to allow direct trading between sterling and renminbi is unlikely to have a huge impact in the short term, but it is an important deal symbolically for several reasons.

Having the security that currency conversions can be easily done and reversed should encourage [British] investors. The deal is a plus for investment and trade between China and the UK.

This agreement — the fourth currency that can now be directly exchanged with renminbi — will also increase the availability of renminbi outside China. Ultimately, that should encourage governments and investors to start considering switching some of their currency reserves into renminbi and out of the dollar. It is a further step on the road towards full internationalisation of the renminbi.

More immediately, settling trades between China and Britain without the need for a dollar conversion in between is likely to have a muted impact.

Yes, companies will save the cost of an extra conversion into dollars, but many avoided that through banks which already offer renminbi services in the UK — not a difficult process and one that allowed firms to arbitrage.

A similar deal between China and the ECB [European Central Bank] should probably follow soon. But with the CIPS arriving in 2014, direct conversion of renminbi with banks onshore in China will be available, making the conversion with any currency easier. CIPS will effectively create a renminbi clearing system for the whole world. Any foreign bank with a counterparty in China will have access to renminbi clearing and conversion. This will help to drive turnover in the onshore renminbi market and further strengthen the position of renminbi in the global FX market.

Raymond Yeung, senior economist, ANZ:
With the announcement of the direct conversion of the pound and renminbi, we see a similar development for the euro and the Chinese currency in the pipeline, given the recent European Central Bank-People’s Bank of China swap deal. The eurozone is China’s second largest export destination (excluding Hong Kong) and source of imports (excluding Japan), with China representing 6.4% and 11.9% of the eurozone’s 2012 exports and imports, respectively.

These currency developments will make it easier for businesses to bypass the dollar in bilateral trade and we have anecdotally seen increasing interest from our European clients in using renminbi in trade. Meanwhile, the renminbi-pound conversion will enhance the renminbi capability of sterling-denominated banks in London, which stands to benefit from an enlarging euro-renminbi market.

At present, trade-related settlements are mostly done via the Hong Kong market. With the implementation of CIPS in 2014, clearing and settlement would be done more easily with Shanghai. The Swift-based system should offer an internationally compatible option for cross-border transactions. Pending other complementary measures such as appointment of participating banks, offshore parties located in UK and continental Europe may be able to settle with the onshore parties more directly.

By then, the current architecture that relies on a Hong Kong Nostro account may also start to fade.


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