The clearing of offshore renminbi is one of the most important elements in the effort to internationalise the currency but it needs broad enhancements to met longer-term needs, says Swift.
At the moment there are two channels for banks to clear renminbi. The first and biggest is through the designated bank in Hong Kong – Bank of China Hong Kong. Swift estimates that it processes 70%-80% of offshore renminbi clearing. Alternatively customers can an agent bank to settle directly with a correspondent bank in China.
Both have constraints. While Hong Kong’s RMB real time gross settlement (RTGS) system allows the currency to be cleared until 23.30, local time, the Hong Kong FX market and China National Advances Payment System (CNAPS) both close at 17.00 which makes it impossible for European markets to square positions overnight.
And for clients using an agent bank, cash from the People’s Bank of China (PBoC) can only be withdrawn as 9.00 the next day.
In a new white paper on renminbi clearing, Swift says although the current system is adequate, there is recognition that more needs to be done to meet future demand.
“The community view is that the existing arrangement for offshore RMB clearing is appropriate in the current environment. In the medium-to-long term, however, it may be important to have an enhanced platform that can address the need for longer operating hours to cover various time zones and lower the amount and cost of liquidity required to support these transactions,” said the paper.
Specifically, Swift says the primary goal of any future RMB clearing system is to support the need for seamless routing of RMB payments around the world’s and not only in China.
It also calls for more efficient collateral management. Additional features that would be beneficial if not necessary including netting, gross settlement and the simultaneous settlement of two FX transactions known in Hong Kong as payment-versus-payment (PvP).
“PvP is important because any future system could eventually work towards the elimination of Herstatt risk for RMB. This system could work with existing multi-currency RTGS systems with RMB capabilities by providing access to offshore RMB centres while the local RTGS addresses Herstatt risk,” said Swift
Herstatt risk is the risk that one party in an FX fails to make a payment even though it has been paid by a counterparty.
Swift, which focuses on electronic payments and messaging, is also calling on work to be done to allow for the use of non-Latin characters, such as those used in Chinese, in financial messages. Currently, four digit codes, called Chinese Commercial Codes (CCC), are used to represent a single Chinese character, though this system has its disadvantages.
“This may lead to potential gaps in sanctions compliance – if a bank is scanning only Latin names on regulatory watch lists, it may inadvertently accept payments from or make payments to a sanctioned entity,” said the report.
The organisation is liaising with the industry on a solution that would allow Chinese characters to be read in financial messages using existing systems, but cautions that discussions are at an early stage.
One of the biggest debates about offshore renminbi clearing has been whether China will establish more clearing banks outside of Hong Kong. Although Swift does not speculate on this point it does identify the top ten offshore RMB centres in terms of volumes of financial payments. In addition to Hong Kong, (what Swift calls the RMB hub) China, UK and Singapore, the rest of the list comprises Malaysia, US, Macau, France, Mongolia and Taiwan and presents 92.7% of worldwide renminbi traffic.
“The expansion of offshore RMB hubs such as Hong Kong will ultimately depend on the strategy adopted by the PBoC towards these centres. The ability for local clearing might be viewed by countries as a key element for the continued evolution of their financial centre. Other nations might want to control trade and currency issues on their own terms, in their own regions, and by their own rules,” said Swift.
“Whatever the initial motivation for these developments, their speed of processing payment, operating hours and other value-added services will be possible points of differentiation. A goal should be to level the playing field for RMB with other currencies.”