Battle for European RMB trading hub supremacy intensifies

By:
Carol Dean
Published on:

Competition among European financial centres to be the main renminbi trading hub is intensifying after the Bundesbank and Bank of England struck agreements with China to clear and settle payments in the currency.

London, Frankfurt, Paris and Luxembourg are vying to capture the largest piece of the renminbi-denominated trading outside of the Asia-Pacific region, with these latest agreements marking a new phase in the battle for dominance.

The Bundesbank signed its agreement with the People’s Bank of China (PBoC) on Friday – a deal that was followed by the Bank of England (BoE) on Monday. It is not known if Paris and Luxembourg are planning on securing similar deals.

“The agreements with London and Frankfurt demonstrate these countries’ strong commitment to China,” says Janet Ming, head of Royal Bank of Scotland’s China desk for Europe, the Middle East and Africa. “It is good for trade and will attract foreign investment into those countries from China.

“This is a major step forward for the renminbi.”

The renminbi only graduated to a top 10 payments currency for the first time last year, according to global transaction services organization Swift, but its use is increasing rapidly. The redback was the seventh most-used world payments currency in January – up from eighth in December.

Strikingly, renminbi-denominated payments increased by 30.6% in January from December, while growth for all payment currencies was 4.8%, according to Swift. However, the renminbi, with a 1.39% market share of global payments, remains well behind the US dollar, euro and sterling in particular as a global payment currency, as well as the yen, Canadian and Australian dollar.

This gap is expected to continue to close, accelerated by the type of clearing agreements the Bundesbank and BoE have signed with the PBoC.

In a statement, Carl-Ludwig Thiele, member of the Bundesbank’s executive board, says: “This clearing solution will allow renminbi payments within Germany and with counterparties in China to be cleared and settled in Frankfurt. A clearing bank will be designated to provide this service.

“This will make it much easier for the German real economy to clear and settle payments denominated in renminbi, marking a major step forward in intensifying Germany’s economic relations with China.”

Meanwhile, Sir Jon Cunliffe, deputy governor of the BoE, says: “London is at the heart of the global financial system and is a major centre for RMB business. It is therefore entirely appropriate that London should play a role in the further internationalization of the RMB through the opening of a RMB clearing bank.”

For the German and UK authorities, the next step is mandating their official renminbi clearing bank, mandates that must go to a branch of one of China’s main banks so that it has access to renminbi liquidity through the PBoC.

Bank of China, Industrial and Commercial Bank of China, Bank of Communications, Agricultural Bank of China and China Construction Bank have international branches in Frankfurt and London.

A renminbi clearing bank is essential because they “create a channel for cross-border RMB settlement through the banking system”, says Ming. “Before the Chinese government launches the China International Payment Platform, which will serve as a global RMB clearing system, the assigned clearing bank would help banks access the existing RMB onshore clearing system, China National Advanced Payment System, to ease RMB clearing.”

The announcements from the German and UK central banks came as Deutsche Börse said it had signed a strategic partnership with the Bank of China. The partnership sees Bank of China become a trading and clearing participant, enabling Chinese corporate debt and equity issuers and Asian investors to directly access German and European capital markets.