BNY Mellon backs London to lead European race for offshore RMB

London and Singapore are fast closing the gap on Hong Kong in the race to become centres for offshore renminbi business and capitalise on Beijing’s ambition to make the RMB a global currency.

Fred DiCocco, Asia-Pacific head of sales & relationship management for BNY Mellon’s Treasury Services business, says London and Singapore will emerge as the two dominant offshore RMB hubs alongside Hong Kong by 2020.

“The impact the continued internationalisation of the RMB will have on the global monetary landscape cannot be overstated,” said DiCocco. “To give this some context, around 20% of China’s $4 trillion in annual foreign trade is conducted in RMB today, a figure which could surge to over 30% as early as next year and see the RMB become one of the top three global trade currencies. It would not be naïve to suggest that it could rise to as much 50% by 2017.

His view is matched by figures from Swift, which show the UK leading European countries vying for a share of RMB settlement business, with a 123.6% annual growth to July 2014.

“With China-EU trade representing the second largest global economic co-operation pact, and with more than 40% of all global foreign exchange (FX) trading taking place in London, it was no surprise two years ago to see London take the initiative to position itself as the main offshore trading centre for RMB. It quickly rose to a commanding position and assumed the second largest centre in respect of market share,” said DiCocco. “Hong Kong is still the undisputed number one offshore RMB payments centre with a 71% market share, but its leadership position is slowly eroding having dropped by around 10% over the last three years with London and Singapore both establishing themselves as strong alternatives.  While their market shares are minor when compared with Hong Kong today, languishing in single digits, I expect we will see both centres surge forward and break away from the rest of the pack over the next few years. By 2020, it is possible we will see London and Singapore join Hong Kong to form the top three RMB offshore centres by market share. Only time will tell who the winners will be, but I believe by 2020 we will see a three-horse race between London, Singapore and Hong Kong for supremacy, with Hong Kong probably continuing to lead the way.”

Singapore had a head start that stemmed from already having an infrastructure to process and provide easier access to RMB locally in the form of a nominated clearing bank, China’s state-owned ICBC. London and Beijing have also signed an agreement to set up an RMB clearing bank in London, but no institution has yet been named. Singapore and London have agreed to co-operate on further development of offshore RMB through a new ‘UK-Singapore Financial Dialogue’ agreement.

DiCocco says this “can only be of mutual benefit to both countries” but warns that there is no room for complacency. “Countries that have traditionally had strong trade or investment ties with China, such as Korea, Germany and France, are also seeking to be at the heart of RMB offshore trading and have a strong case. Even those centres which do not have historic ties with China are making overtures to attract China’s financial clout. Luxembourg, for example, has an attractive pitch: minimal red tape and a business-friendly political regime in a country where the financial services industry is the biggest contributor to gross domestic product (GDP) – at 25% last year.  The country has recently publicly stated it wants to become an overseas centre for Chinese investments and it will be interesting to see how it fares.”