Eurozone’s first RMB clearing hub in Frankfurt faces London competition
Though Germany lacks sizeable RMB deposits and liquidity, Frankfurt is well-positioned to intermediate trading flows between China and the eurozone, but it lacks London’s financial depth.
Renminbi internationalization got another boost when the People’s Bank of China signed a memorandum of understanding with the German Bundesbank to set up an RMB clearing bank in Frankfurt on March 29.
The choice of Frankfurt is unsurprising, given the large amount of cross-border flows between China and Germany. According to data by Swift, Germany was among the top five countries to use the RMB for trade with China along with Hong Kong, Singapore and Australia.
German companies, such as Siemens, have adopted the RMB for cross-border invoicing and payments. RMB payments between the two countries jumped 70% to 14.1% of all payments in September 2013, according to data from Swift.
Frankfurt is being positioned as the main payments hub for RMB trade between China and Europe versus London, which is currently the destination of choice for those interested in RMB-denominated investments outside of Asia.
According to Andries Hendriksen, Commerzbank’s head of corporate finance for Asia, London will continue to focus on financial and inter-bank related transactions. “As the financial capital of the largest economy of Europe, Frankfurt will focus on clearing activities deriving from these transactions resulting from economic activity,” he says.
However, investment potential has been a leading driver for offshore RMB, and the main arguments in according clearing hub status to the UK and Singapore have been their large base of RMB deposits.
Even Taiwan, which has greater trade than Germany with China, at $197 billion versus $161 billion in 2013 – according to the Chinese General Administration of Customs – had more than $3 billion in RMB deposits in Taipei before a clearing bank was installed at the end of 2012.
To be fair, the quantum of RMB deposits in Frankfurt has not yet been measured, says Hubertus Väth, managing director at Frankfurt Main Finance. However, RMB liquidity is a challenge. Väth argues German companies, who are major participants holding RMB deposits in Hong Kong, will begin to move their deposits to the Frankfurt clearing hub to boost liquidity.
Yet Siemens, the poster boy for German RMB adoption, sees no reason to change the status quo. Diana Schauer, a Munich-based spokesperson for Siemens, says in an emailed statement that with a regional treasury centre and a central RMB banking account in Hong Kong, the firm does “not see any demand to change its current set-up”.
With a number of European firms maintaining regional treasury centres in Hong Kong and Singapore, both of which are large clearing hubs with a natural investor base for RMB products, the argument can be made for Frankfurt to focus on building up liquidity from local sources to wrest some of the advantage that London has in its investment potential.
Still, London looms large over Frankfurt’s growth prospects in the RMB. Not only is London a clearing hub, it has access to a renminbi qualified foreign institutional investor (RQFII) quota of RMB80 billion ($12.8 billion). It is also a leading centre for dim sum bond issuance outside Asia.
Furthermore, Paris was given an RMB80 billion quota at the end of March and the Luxembourg Stock Exchange has been listing dim sum bonds since 2011.
Väth, however, sees the different capabilities of RMB centres in Europe as synergetic rather than competitive. “A lot of the money invested out of Luxembourg, for example, originates in Germany,” he says.
Candy Ho, head of RMB business development for HSBC in Hong Kong, says the mutual listing scheme in Europe allows RMB liquidity to be fungible in the eurozone, so another RQFII centre would be unnecessary.
“For example, if a German fund manager has operations in Paris or London, it can be eligible to apply for a RQFII quota that is already made available in those two cities,” she says.
Efforts are under way to provide greater investment products in the German city with a recent agreement between Deutsche Börse and Bank of China to collaborate on a mutual trading and clearing arrangement, which will allow Bank of China to underwrite Chinese initial public offerings in Frankfurt.
According to a source familiar with the arrangement, this agreement might lead to greater flow from China. However, the process will be gradual, he adds, given that the decision to list equities or bonds will be heavily influenced by London’s “image as a large investment centre more than any technical expertise or infrastructure that the city may have”.