Macau turns to a hub

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Instead of ignoring its colonial past, Macau is using it as a unique selling point for its renminbi clearing services by targeting Portuguese-speaking markets. But that business hasn’t arrived yet, and it will always struggle to overcome the challenge of the commodity dollar.

By Noah Sin

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Although the sovereignty of Macau was handed to China in 1999, the former colony still bears the signs of four centuries of Portuguese rule. From the bilingual street signs to Macanese cuisine, much of the city is a blend of Chinese and Portuguese cultures; even the local currency, the Macanese pataca, is known as the Portuguese currency or pou bai in Cantonese by locals.

If the word pataca is a symbol of the past, the renminbi, or ‘the people’s currency’, is the face of the future. Macau was put on the frontline of China’s efforts to internationalize its currency in 2004, when Bank of China (Macau) became only the second offshore RMB clearing bank, one year after its sister branch in Hong Kong led the way.

Yet the attempt to marry Macau’s Portuguese heritage with the renminbi internationalization agenda only started in earnest in 2015, when the People’s Bank of China allowed Bank of China Macau to start clearing renminbi transactions for banks in lusophone countries, and in 2016, when Chinese premier Li Keqiang declared his support for the Special Administrative Region as a lusophone renminbi clearing hub. The Real Time Gross Settlement system was launched in the territory in 2016.

Macau has an enormous opportunity at hand. In 2017, China’s trade with lusophone countries was $117.6 billion, up 29.4% year on year. Brazil was the largest market, accounting for $87.5 billion of China’s trade with the lusophone world. It was followed by Angola, which made up $22.3 billion of trade with China, according to data released by the Chinese General Administration of Customs and compiled by the Monetary Authority of Macao (AMCM).

This is a big mission for the small territory in southern China.  


Capital control is not just an issue on the Chinese side. A relaxation on both sides will help Macau’s renminbi business massively 
 - Pedro Cardoso, BNU

As of January 2018, renminbi deposits in Macau amounted to P40.3 billion (Rmb32.8 billion, or about $5 billion), according to AMCM’s data. It is smaller than a tenth of neighbouring Hong Kong’s renminbi stockpile, which stood at Rmb546.4 billion in the same month, according to the Hong Kong Monetary Authority. Meanwhile, Macau recorded Rmb5.5 billion of cross-border renminbi trade settlement in January, compared with Hong Kong’s Rmb373.4 billion.

Swift’s renminbi tracker also shows that Macau only cleared 0.23% of all offshore renminbi payments in January, putting it behind the Netherlands and Luxembourg, which cleared 0.33% and 0.4%, respectively. Hong Kong cleared 75.03% of all renminbi payments outside China in the same month.

Then, there is the problem of the shrinking population of Portuguese-speakers – a minority in Macau to begin with. The latest census in the city, taken in 2011, shows that only 2.4% of the population can speak the language, down 0.6 percentage points from a decade ago.

Nevertheless, the lusophone policy has helped Macau, a city of just 650,000 people, differentiate itself from other renminbi hubs, Benjamin Chan Sau San, chairman of the board of directors at AMCM, tells Asiamoney.

“The direction of business development – of targeting lusophone countries – is totally different from Hong Kong, London and Singapore,” he says. “Macau will cooperate with and complement other offshore renminbi hubs, to the mutual benefit of these hubs.”

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Vina Cheung, HSBC

Vina Cheung, global head of renminbi internationalization at HSBC, also thinks Macau is well-equipped for its role. 

Macau may not have the kind of vibrant international capital markets that Hong Kong possesses, but given that its banks are already providing an array of renminbi services, from trade finance and deposits to derivatives, it still has what it takes.

“Macau has the full suite of renminbi clearing and settlement infrastructures,” she says. “If you leave aside investment tools, it is fully equipped with all the renminbi products and services to support businesses. Whatever you can do in the US dollar in Macau, you can do in renminbi.”

Macau’s renminbi hub is particularly well positioned to serve Chinese companies that want to go offshore, including to the Portuguese-speaking markets, Cheung adds.

“The Chinese companies coming to Macau will have part of their portfolios in renminbi,” she says. “In a similar way that Chinese suppliers and retailers in Macau led to greater use of renminbi in the city, these businesses will also drive activity in renminbi cash management.”

Renminbi supply

The effort to promote lusophone renminbi is mainly led by Chinese banks, in particular, the territory’s clearing bank, Bank of China, says Carie Li, economist at the treasury division at OCBC Wing Hang Bank. This is because most of the renminbi demand is coming from mainland China.

“The renminbi supply in Macau comes from deposits, which caters for the demand of Chinese corporations operating offshore seeking RMB loans,” she says. “Chinese banks in Macau can offer better rates for renminbi deposits than in other currencies as China’s deleveraging campaign has driven up yields of renminbi assets. They can always get a boost in renminbi liquidity from their parent bank.”

Agricultural Bank of China became the latest addition late last year, when it obtained regulatory approval to open a branch in Macau.

But some of the territory’s local banks believe they have more to offer. Banco Nacional Ultramarino (BNU), a note-issuing bank in Macau that started in business there over a century ago, is seeking to leverage the network of its parent, the Portuguese state-owned Caixa Geral de Depósitos, which has a presence in seven of the eight lusophone markets.

These connections have helped the bank source corporate clients in lusophone markets, many of whom are exporters of goods or raw materials to China, Pedro Cardoso, chief executive at BNU, tells Asiamoney. The bank has a clear division of labour, allowing branches in the lusophone markets to open renminbi accounts for clients, while concentrating the clearing of renminbi transactions through BNU in Macau.

BNU has a decade of experience in providing renminbi products, and joined the renminbi clearing business about two years ago. But as Chinese-lusophone trade increases, Cardoso reckons the bank’s product range will need to expand to meet the demand.

“Right now, we have the basic services, such as renminbi transfer, remittance, financing and deposits,” he says. “Over time, we can offer a wider variety and more sophisticated products. We may be able to help our clients to hedge FX risk with forwards and swaps and help them invest in onshore securities.”

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Pedro Cardoso, BNU

Sitting less than a mile away from BNU’s head office, Zhang Chen, general manager at Well Link Bank, is moving his team in a different direction.

The bank was formerly the Asian arm of Portugal’s Novo Banco; it was acquired by Hong Kong Well Link Financial Holdings in December 2017. As Well Link rebrands, it is remaking itself as the bank for the Greater Bay Area – a central government initiative to integrate the economies of Hong Kong, Macau and Guangdong province – and through that, it will service outbound renminbi transactions to Portuguese-speaking markets.

Zhang is not only relying on the government initiative to bring about more trade flows, he is also hoping that it will make up for any shortcomings in Macau as a renminbi hub.

“Macau is a special administrative region of China, and as such it has had a lot of policy support from the central government, and it will continue to do so,” he says. “Through the Greater Bay Area, Macau and Hong Kong will both be more integrated with the region. So, I don’t think liquidity is going to be a problem in future. There will probably be more cooperation between banks in Hong Kong and Macau.” 

Overall revenues

Despite the recent expansion of Chinese-lusophone trade, the impact of greater renminbi business is not being felt on bank balance sheets.

While Well Link is providing a range of services in renminbi, including deposits, certificate of deposits, trade finance and even renminbi/dollar futures contracts through Bank of China, Zhang tells Asiamoney that these services accounted for less than 10% of Well Link’s revenue in 2017, whereas trade finance generated 30% of overall revenues.

BNU did not disclose its renminbi revenue figures, but Cardoso admits that it is not a business that can be built in a day.

“The impact of renminbi business on our revenues is still not very material,” says Cardoso. “We don’t put a hard figure or a short-term target on this business line. This is a long-term mission for us.”

China’s increased economic interaction with the lusophone markets is not necessarily an upside for Macau’s renminbi business, especially when China is trading mostly commodities with these markets.

“There is still a long way to go before commodities will be settled in renminbi on a large scale,” says Cheung. “Bargaining power is key for commodities trade and the use of settlement currency. China is a dominant consumer in some commodities, such as soybeans, coal, cotton and copper, and a major importer of oil and iron ore.”

Another challenge for Macau is that the banks, while continuing the expansion of their renminbi business, will look beyond the territory for better prices and opportunities, says OCBC’s Li.

“For instance, businesses may not necessarily want to book non-deliverable forwards in Macau, given the concerns about the renminbi hub’s liquidity,” she says. “The deposit pool is not big enough.”

On the other hand, as opportunities in the onshore market arise, banks may go for renminbi business closer to the border. In 2017, BNU set up a branch in the Hengqin Free Trade Zone, a 106 square-kilometre business laboratory in neighbouring Zhuhai. As Cardoso explains, BNU’s business in Hengqin has a different focus to its Macau operations.

“For corporate clients who started their operations in Macau and would like to use it as a springboard to enter China, we will service their renminbi needs from Macau,” says Cardoso. “But there is a growing group of clients who would like to start in China – the bigger market – first, and we can meet their needs through our Hengqin branch.”

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Ultimately, however, the greatest obstacle facing the Macau renminbi hub is one that has always stood in the way of the renminbi internationalization project: capital controls. China notoriously tightened its grip on outbound flows after its currency went into free fall in 2015, setting back progress on its capital account liberalization. But parts of the lusophone world are affected by the same issue.

“Because of the differences in the level of demand for cross-border settlement and financial products and services, and other factors such as capital control in certain countries, the proportions of renminbi business coming from lusophone countries are uneven,” says Chan of AMCM. “Among the lusophone countries, Brazil, Angola, Mozambique and São Tomé and Príncipe have capital controls. This has, to a certain degree, limited businesses in these countries in adopting the renminbi as a settlement currency.”

But BNU’s Cardoso argues that all is not lost – if governments on both sides can agree on reciprocal actions.

“Capital control is not just an issue on the Chinese side. You have the same issue in some of these Portuguese-speaking countries, such as in lusophone Africa,” he says. “A relaxation on both sides will help Macau’s renminbi business massively.”

Well Link’s Zhang is also upbeat about the renminbi’s prospects. To him, it makes financial sense for the emerging markets within the lusophone world to use the renminbi, at least when they are dealing with China.

“For countries such as Angola and Mozambique, their local currencies are very illiquid internationally,” says Zhang. “Instead of using a third-party currency like the dollar, they may opt for the renminbi, as it reduces the FX risk when trading with Chinese companies.”

As AMCM’s Chan suggests, the success of the project will depend on the extent to which the Chinese currency is accepted in the lusophone world; in the long run, Macau’s monetary policy chief is bullish about the prospects.

“The renminbi will potentially be the major trade settlement currency between China and lusophone countries,” says Chan. “It will also be used extensively in investment, financing and hedging of risk. All this will help forge Macau’s renminbi clearing centre and financial service platform.”