Canada could become the only country in the world with two yuan trading hubs
Feb 2015
What could be better than the news that Canada has secured a yuan trading hub? Perhaps the possibility that it could be getting two — one in Toronto and another in Vancouver.
As the National Post reported Tuesday, Stephen Harper is expected to announce during his upcoming trip to China that he has secured a so-called currency hub designation for Canada. It would make Canada the first country in North America to have an offshore yuan (or renminbi) hub.
Vancouver and Toronto are both vying for the hub designation but importantly, they have also committed to working towards the goal of having one each, something no other country has among the nine that currently have the designation. Hubs are currently located in Hong Kong, Singapore, London, Sydney, Luxembourg, Paris, Frankfurt, Taipei and Seoul. (San Francisco is also in the running for a North American hub, but is reportedly further behind in its progress).
Thursday BMO Economics issued a two page report on Canada becoming the first North American Renminbi (RMB) trading hub. According to BMO, it “represents an opportunity for Canada to become an even more attractive location for business.”
An offshore currency hub is authorized by China’s central bank and allows for faster and more certain execution of trades into yuan. When fully operational, an offshore currency hub, also known as a settlement hub, allows for direct business between the local currency and the Chinese currency. Without a hub and without the pricing of goods or services in yuan, a third currency — most likely U.S. dollars — must be used.
“But that doubles your currency exchange costs and also increases your risk in terms of time and process,” said Colin Hansen, a former B.C. finance minister and the president of Advantage B.C., a group that’s pushing for a hub in Vancouver.
One of those risks arises because the yuan is a managed (non-floating) currency, so to mitigate the risk “there has to be a guarantee that you will be able to get access to the yuan at a rate that is fair,” added Mr. Hansen. HSBC reported that, based on a recent survey, 55% of Chinese businesses would offer discounts — of up to 5% — if transactions were conducted in yuan. Another international bank, BNP Paribas suggested that discounts could be in the 1%-3% range. Aside from better terms, the Canadian Chamber of Commerce has estimated a currency hub would also lead to $21-billion to $32-billion of additional exports over a 10-year period.
“Knowing exporters as I do, and how many of them are growing their business with Chinese buyers, I know that it is a significant cost to their business to have to go round trips through U.S. dollars,” Bank of Canada Governor Stephen Poloz told the National Post this week.
Mr. Hansen, who is also travelling to China later this month, said the best way to view a currency hub is not as a physical location, but as a “facilitation.” The operation is run more by computers than humans: The hub “in and of itself doesn’t create a lot of jobs,” he said. “It’s all of the commercial activity around it [that’s created] because the clearing capacity is there.”
And earning a currency hub designation makes it easier to attract international business, including Chinese head offices. With two major Canadian cities getting that hub, “the Chinese companies that are globalizing and are looking for a North American head office … will be more inclined to put that in Toronto or Vancouver,” he said, rather than in major U.S. cities without a yuan hub. Indeed on his upcoming trip to China, Mr. Hansen will be making that argument to Chinese companies.
Currency hubs are needed for two main reasons: the yuan is not freely convertible and is not freely traded outside of China. The currency also doesn’t float freely but is managed within a range of values. Since decoupling the yuan from the U.S. dollar in 2005, Chinese authorities have taken steps to internationalize their currency. With the U.S. dollar, the euro and the British pound dominating global commerce, and with the yuan not capable of full convertibility, positioning currency hubs in key commercial markets has been one tactic that Beijing has used to help internationalize the yuan, which has risen to become the eighth most heavily traded currency — up from the 20th— in the last decade.
The advantage of a Vancouver hub is that, given the time difference from Toronto, it helps in allowing transactions to be settled in the “24-hour clock of commerce,” said Mr. Hansen. The hub could complete work on a file that was started on in Hong Kong, before being transferred to London, and then to Vancouver. The B.C. Chamber of Commerce has also concluded that the Pacific province would see the greatest increase in exports from a hub.
Still, while the Prime Minister’s announcement of Canada’s new trading-hub status (he arrives in Beijing on Saturday), will undoubtedly be welcomed by companies trading with China, there are a number of steps that still have to be taken before Canadian settlement hubs become a reality. Canada and China’s central banks will have to reach a bilateral swap agreement, in which they guarantee that they will make available the requisite foreign currency if it is needed. The two central banks put limits on how much of their currency they will assign to the swap. The People’s Bank of China has about two-dozen such swap agreements.
A Chinese bank will also have to be designated as a settlement bank, allowing it to tap directly into the internal Chinese yuan settlement system. The Bank of China has been named the settlement bank for five currency hubs.
A Chinese bank will also have to be designated as a settlement bank, allowing it to tap directly into the internal Chinese yuan settlement system. The Bank of China has been named the settlement bank for five currency hubs.
And a deal has to be reached on a Renminbi Qualified Foreign Institutional Investor program. Known as RQFII, this program allows foreign institutional investors to use offshore renminbi, or yuan, funds to invest in China’s capital markets and inter-bank bond market within approved quotas. This week China signed a deal with Qatar at the same time as it signed a currency swap arrangement.
With those three elements in place, it can take between six months and two years for the hub to be fully operational.
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