Canada ready for renminbi push

The establishment of a clearing bank will support Canada’s ambitions in the offshore renminbi financial markets, says British Columbia Finance Minster Michael de Jong.

Canada stole the spotlight in the offshore renminbi market last week, as it became the first North American country to win an offshore renminbi clearing licence.

The People’s Bank of China on November 9 appointed Industrial & Commercial Bank of China (Canada) as the renminbi clearing bank in Toronto, and British Columbia Finance Minister Michael de Jong explained to IFR why it is important to have a Canadian renminbi hub.

“It is a hub for all Canada,” he said. “A Canadian renminbi hub will leverage the competitive advantages of both Vancouver and Toronto for the benefit of Canada. The designation of a Canadian hub can help make bilateral trade and investment more efficient and effective, allowing for stronger growth of trade and finance between the two countries.”

“A Canadian hub can also help to expand the range of financial products and services denominated in the Chinese currency.”

BC has established a working group with the government of Ontario to collaborate with the banking trade associations of BC (AdvantageBC) and Toronto (Toronto Financial Services Alliance).

“We believe this collaboration helped achieve the designation of the Canadian hub as quickly as we have seen: just one year from the time of BC’s first renminbi bond issue, Canada’s place has gone from a notion to reality,” said de Jong.

BC was the first foreign government to issue into the renminbi market in late 2013, and has now returned with a second issue of larger size (Rmb3bn) and a longer duration (two years).

“We will continue to look for future opportunities to return to the market, hopefully for longer-term financing as the market continues to mature,” said de Jong.

With an annual fundraising target of around US$3.6bn next year, the province can fund in many channels and currencies. However, it is interested in issuing in renminbi to raise its profile in the currency and create a benchmark for others.

Private-sector Canadian issuers are expected to follow suit, particularly after the swap agreement and the establishment of a clearing bank.

Thanks to close connections between the Canadian and US economies, a hub in Canada can also benefit from trade settlement, finance and export with the US. Toronto and Vancouver, as well as other Canadian cities, can serve the US.

The US has been an unenthusiastic participant in renminbi internationalisation, fearing that the currency’s growth will hurt the status of the US dollar as the world’s major payment currency.

“We capitalise on their hesitation,” said de Jong.

For Canadian firms doing business with China, using renminbi can be more efficient than using a third currency of an unrelated country, such as the US dollar.

However, only 5% of the Canadian businesses surveyed by HSBC in July this year said they had conducted cross border transactions in renminbi, compared to 22% of global companies and 17% of US companies. Conversely, 55% of Chinese businesses surveyed said they would offer discounts of up to 5% to their trading partners for renminbi-denominated transactions.

“The survey results highlight the need for Canadian businesses to learn more about how using RMB can help them reduce costs and secure a competitive advantage when trading with China,” said Linda Seymour, head of commercial banking at HSBC Bank Canada.

For example, HSBC Bank Canada’s first client to open a renminbi savings account in 2012 saved nearly US$100,000 by settling a US$5m trade with its Chinese supplier in renminbi.

 That means there is enormous potential to benefit from trade settlements in renminbi which allows Canadian companies to offer products at more competitive prices.

It may also facilitate further Chinese investment in Canada in areas such as resources development, energy development, aerospace and natural gas.

China is Canada’s second largest trade partner with bilateral trade at US$54.4bn in 2013, representing a 6% year-on-year growth.

BC’s trade with China increased to C$6.6bn (19.8% of Canada’s total) in 2013, up from just C$700m (2.3% of Canada’s total) in 2001 – an increase of more than 88%.

Canada is a strategic location for renminbi coverage, as it is located mid-way between London and Hong Kong, and could play a part in providing 24-hour coverage for renminbi trade settlement.

China and Canada signed a memorandum of understanding on cross-currency clearance and a Rmb200bn/C$30bn (US$32.68bn) bilateral cross-currency swap agreement on November 8. The agreement has a three-year term and is extendible.

On the same day, China extended the RQFII scheme to Canada and granted a Rmb50bn initial quota.