Until now, the swap lines that the PBOC had granted to South Korea and more than 15 other central banks, including Brazil and Australia, only acted as stand-by facilities. Central banks in these countries could draw RMB from the PBOC to help financial institutions should they run short of RMB to settle trades.
This latest deal paves the way for other countries to activate their swap lines and in turn boost the use of RMB for trade settlement globally. It will allow many more of Chinas trade partners to settle RMB trade directly, without having to go through the only available clearing pipeline operated in Hong Kong that is also subject to quota control.
The unrealised potential of these swap lines on boosting RMB settlement is huge. If all the other countries activated the entire amount of their swap lines, as South Korea did, the total renminbi funds available for companies to borrow for RMB trade settlement would be CNY1.67 trillion. This would account for 37 per cent of Chinas total trade, based on 2011 and 2012 data.
According to SWIFT data, the RMB currently accounts for only 0.42 per cent of global cross-border payments and at the end of 2012 ranked 16th in global payment currencies. The data also shows that 98 per cent of RMB payments in London and 94 per cent in Singapore were for settling institutional transfers rather than trade.
An important component to increasing the use of RMB in trade is increasing the pool of CNY, the version of RMB deliverable outside China. Unfortunately, the opening of the Korea / China swap line will not directly add to this pool. Imports from either side will be settled in the currency of the exporters country of origin, with the importers agent bank drawing on the swap line to obtain the foreign currency to make the payments. There will not be any excess CNY liquidity outflows since the trades will be settled back-to-back with payments.
Nevertheless, this latest Korea / China arrangement will be a boost to the ranking of the RMB as a global payment currency, which should in turn be a boost to global investors confidence in holding RMB-denominated assets. It may also open up more doors to the creation of a swap line between the UK and China, which has not happened yet.
So, this unprecedented move by the PBOC for the promotion of the offshore deliverable RMB market is a very significant one in all aspects. We envisage that more of the existing swap lines will be similarly activated while the PBOC continues to extend new swap lines to more central banks globally.
For more RBS Insight content, click here
The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc, The Royal Bank of Scotland N.V or an affiliated entity (RBS) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.
RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.
The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.
The Royal Bank of Scotland N.V., incorporated in the Netherlands with limited liability. Registered with the Chamber of Commerce in The Netherlands, No. 33002587.
The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.