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Foreign Exchange

Clearing bank to establish Singapore as Asean RMB gateway

Singapore looks set to capture more renminbi business from Association of Southeast Asian Nations (Asean) corporates, as plans develop to establish a clearing bank for the Chinese currency, according to Asiamoney, a sister publication of EuromoneyFXNews.

Singapore’s ministry of trade and industry (MTI) announced on Friday that two eligible Chinese banks operating in Singapore will be granted Qualifying Full Bank (QFB) privileges, one of which will be authorized as a clearing bank for renminbi – also known as yuan – in Singapore. The Monetary Authority of Singapore’s QFB programme will encourage foreign banks to deepen their roots in Singapore, which will enhance the nation’s financial stability. QFBs will have greater branching privileges than other foreign banks and greater access to the retail market.

“Firstly, Singapore is in the process of liberalizing its domestic banking sector,” Irvin Seah, senior economist at DBS Bank, tells Asiamoney Plus. “They have announced the intention of giving out more QFB licences to foreign banks so they can use Singapore to cover their business in the region.

“Secondly, China has become Singapore’s largest export market and we expect more bilateral flows between the two countries.”

The bilateral trade between China and Singapore rose by 6.4% year-on-year to SGD101.4 billion ($80.5 billion) in 2011, according to Singapore’s MTI.

This recent development is positive for Singapore, as the lion city seeks to increase its market share of renminbi business and increase its presence as an offshore hub for the Chinese currency, especially for Asean-based corporates.

Once Singapore obtains its own clearing bank, it does not have to rely on Hong Kong’s offshore renminbi market to ensure sufficient liquidity of the Chinese currency in its domestic market. As a result, this can substantially reduce market irregularities and the rise of settlement risk.

“This is probably a catch-up for Singapore in terms of renminbi business,” says Li-Gang Liu, head of greater China economics at ANZ. “Given Singapore’s comparative advantage in foreign exchange trading, it is likely the RMB market liquidity will increase and market-based renminbi products can be innovated.

“Asean firms will also be more willing to use the renminbi as a trade-invoicing currency.”

The ministry did not name the two Chinese banks in the press release and said that “implementation details will be worked out by the relevant financial agencies in Singapore and China in due course”.

There are three Chinese banks operating in Singapore – Bank of China, Industrial and Commercial Bank of China (ICBC) and China Construction Bank – none of which are under the QFB licence.

“Given that Bank of China is a settlement bank in Hong Kong, perhaps another big-four bank could act as a clearing bank for Singapore so that no one bank can capture all the profits of renminbi business,” says Liu.

The Laos central bank has appointed ICBC as a clearing bank for renminbi, as previously reported by Asiamoney Plus, putting it ahead of Singapore and other potential offshore centres, which must clear the currency through Hong Kong.

China will also expeditiously process all applications made by selected Singapore banks for the establishment of branches and sub-branches in China, subject to their prudential law, regulations and rules, states the ministry.

According to a press release by the China Banking Regulatory Commission, the selected Singapore banks include United Overseas Bank (China), DBS and Oversea-Chinese Banking Corp.

Hong Kong and Singapore RMB market share

In terms of direct competition between Asia’s two leading financial hubs – Hong Kong and Singapore – the former is still expected to outperform the lion city given its closer ties with China. Despite this, Singapore is able to capture a fair share of renminbi business due to its own comparative advantage, say economists.

“Policies still tend to favour Hong Kong and the market has close dialogues with the regulators in Beijing,” says Liu. “The advantage in Singapore is that China has a free-trade agreement with Asean countries. It’s very natural that Singapore can be the centre for that.”

DBS’s Seah agreed: “Hong Kong is ahead of the race in this aspect. But given rising engagement between China and Asean, that’s where Singapore can play an intermediary role.”

China is Asean’s biggest trading partner. Bilateral trade rose 26.4% in the first nine months of 2011 to $267 billion with an $18.9 billion surplus in favour of the bloc, Chinese customs data shows.

A China-Asean free-trade agreement came into effect in January 2010. Trade between China and Asean nations is expected grow by 20%-30% during the next three years, believe economists.

As a result, market experts believe most of the Asean business will be diverted from Hong Kong to Singapore, largely because of the convenience in terms of geographical closeness.

Singapore could also potentially outshine Hong Kong as a renminbi wealth-management hub, due to its strong private banking industry.

The boost in renminbi-denominated wealth management products has resulted in the growth of Singapore’s pool of renminbi deposits, which stands at Rmb60 billion ($9.4 billion). While steps have been small and incremental – merely one-ninth of Hong Kong’s Rmb552.4 billion and less than London’s Rmb109 billion – this could potentially grow as long as the lion city leverages on its asset and wealth-management strength.

“Given that Singapore has become a significant wealth-management centre globally, I would say the incentive for innovation paths argues that renminbi products could be a wealth-management tool for many private banks located in Singapore,” says ANZ’s Liu.

“If you look at global central banks, they are in the mood for further policy easing, so the search for yield will be the major incentive, and RMB products could benefit from the current environment.”

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