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Chinese banks yearn to trade offshore renminbi


Paul Golden
Published on:

Analysts’ confidence that there is untapped demand from Chinese banks to trade offshore RMB is good news for R5, which last week announced a joint venture with Shanghai Clearing House designed to connect these institutions to the London FX market.


China’s ongoing acquisition of offshore assets and increasing influence in many parts of the world have created a need for its domestic banks as the primary financiers of a growth in demand by Chinese banks to more actively trade renminbi in all centres.


Wendy Tao,
Invast Global

According to Wendy Tao, director of prime services at brokerage Invast Global, easier access to offshore RMB trading would reduce the discrepancy between the use of its currency and China’s status as the world’s second-largest economy.

“To an extent this would increase the involvement of marginal participants, but more significantly it would substantially improve liquidity as both existing and new participants would increase their trading in renminbi,” she says.

Arin Ray, an analyst in the securities and investments group at Celent, also accepts that easier access to offshore renminbi trading should lead to an increase in the number of market participants and improve liquidity.

To date, demand from Chinese-based financial institutions to promote and participate in offshore RMB trading has been focused on the main Asian trading centres of Hong Kong and Singapore.

R5 hopes that its formation of an electronic marketplace in partnership with Shanghai Clearing House will see more of this business done in London.

R5-SHCH Connect will provide connectivity for banks located in Shanghai – followed by those across China – to directly trade FX in London. Demand from Chinese banks for equal access to G10 spot means the service will go live with eight Chinese banks and will launch with HKD, EUR, GBP and USD spot. The first phase is likely to go live just before Christmas.

Second phase

Euromoney understands that – subject to approval by the People’s Bank of China (PBoC) – the second phase of the project, which will cover CNH as well as JPY, CHF, AUD, NZD, SGD and CAD, will go live in the first quarter of 2018.

The service uses the R5 platform which means that – again subject to approval by the PBoC – it will be able to offer onshore Chinese banks access to a wider range of emerging-market currencies. Plans for future expansion also include extending access to products such as forwards, swaps and bonds.

Initial trading expectations are for $2 billion in renminbi transactions per day. There are a further 17 banks in Shanghai that R5-SHCH Connect hopes to onboard and an additional 30 financial trading institutions will be targeted in a second phase.

Jon Vollemaere, R5

The service is aimed at providing Chinese banks with access to deeper liquidity and better pricing for G10 currencies, explains R5 CEO Jon Vollemaere.

“The traditional model of bilateral credit doesn’t work well for Chinese banks,” he says. “R5-SHCH Connect offers a new central credit and clearing model which provides them with equal access to the more liquid markets.

“With onshore and offshore Chinese banks accessing the offshore renminbi market, alongside G10, we expect liquidity to increase significantly.”

The leading Chinese banks are expanding offshore and trade actively in all major currencies – not only in euros, US dollars and sterling, but also yen and Australian and New Zealand dollars, says Invast Global’s Tao, adding: “With Chinese companies active in many parts of the world, domestic banks will continue to have a strong appetite for all major currencies.”

According to Vollemaere, the fact that many of the Chinese banks that have committed to using the marketplace have little or no profile in London will inevitably boost liquidity.

“The onshore and offshore Chinese banks have a huge appetite to trade the G10 currencies,” he adds. “They want to support their clients as they buy and sell goods around the world, and they want equal access.

“There is a large onshore demand for dollars well beyond the import of goods and services as well as demand for currency exchange around the Bond Connect and Stock Connect schemes.”

Strict controls

However, China retains strict controls over its currency, intervening in the market as and when it feels needed, which can impact investors’ views and desire for trading in RMB products.

Arin Ray-160x186
Arin Ray, Celent

Even if the market were to grow, it is likely that would happen gradually and over the longer term, says Celent’s Ray. 

“The Chinese authorities’ focus is to have its currency movements influenced by real economic activities – primarily trade settlement, but also investment and hedging activities – and arbitrage or speculative activities are discouraged; though the line between hedging and speculation is not always clear,” he says.

Bloomberg Intelligence chief Asia economist Tom Orlik sounds an equally cautionary note, observing that the onshore market represents a notable challenge to offshore trading.

“As China takes steps to open its bond market to institutional investors, the need for – and appeal of – holding yuan offshore is diminished,” he concludes. “You can see that in the sharp drop in yuan deposits in Hong Kong.”