Use of the Chinese currency in trade-related services and foreign exchange deals in London is rising exponentially, according to data compiled by the City of London and Bourse Consult.
The city’s attempts to become an offshore renminbi hub are paying off, as the volume of offshore renminbi, or CNH, deals generated and/or executed in London rose materially between 2011 and the first six months of 2012.
An April 2012 study by Bourse Consult surveyed a series of banks to determine the aggregate volume of business done in London during 2011 across a full range of renminbi-denominated financial products and services.
However, banks have since submitted revised figures for 2011 and for this most recent report, a six-month average of the revised figures for full-year 2011 are compared to data for the first six months of last year. The results are up across the board.
“The volume of trade-related services provided by the London banks in January to June 2012 shows strong growth across the board when compared to half the full year 2011 volumes reported in the previous survey,” reads the report.
Trade-related services grew to Rmb2.2 billion (US$353.1 million) from Rmb894 million, a 390% increase. This includes import and export related activities in RMB from London.
The volume in letters of credit denominated in RMB issued in London grew to Rmb3.7 billion, a 20-times increase compared to the six-month average for 2011 of Rmb370 million. Import/ export financing volumes grew to Rmb10 billion, a 19% increase on Rmb8.44 billion.
“Surveyed banks have commented that a growing number of their customers, both importers to and exporters from China, are making trade payments in RMB. Some have recognised that they may gain a competitive advantage by being able to settle or quote in RMB,” according to the report.
“Banks have also been making efforts to adapt their trade-related services so as to make it easier for their commercial customers to settle in RMB. For offshore importers of Chinese goods it has therefore become easier for them to buy RMB to effect payment or to borrow RMB and hedge it in the forward market.”
Price curves for non-deliverable forwards (NDFs) and offshore RMB have been pricing in an expected depreciation of the Chinese currency for some time. If the renminbi is to depreciate, it becomes less important for Chinese importers to deal in US dollars or euros. This in turn is a motivation for an increase in RMB-denominated trade settlement.
“In the first six months of 2012 there was a very significant shift in trading from non-deliverable products to deliverable in all classes except interest rate swaps where the move was firmly in the opposite direction.”
The value of deliverable products traded increased by 150% compared to a fall of 27% in non- deliverables. This is due to increased liquidity in the offshore renminbi pool, which the report ascribes to a reduction in speculative pressure on the currency from offshore investors.
Spot RMB forex grew to an average daily volume of US$1.7 billion, a 150% increase compared to 2011. Deliverable forwards grew to an average daily volume of US$ 1.1 billion, a 33% increase compared to 2011.
Deliverable FX swaps grew to an average daily volume of US$3.1 billion, a 240% increase compared to 2011 and deliverable cross currency swaps grew from a low base to an average daily volume of US$40 million, a 250% increase compared to 2011.
“The onshore market is becoming more liquid and that this has given investors confidence to re-enter the offshore market – especially as the divergences between onshore and offshore rates seen in 2011 did not reoccur in the period of the survey,” said Bourse Consult.
“Some banks also attribute the growth to the increase in intra-day volatility, which has stimulated trading, and an increase in technical trading, such as the squaring of futures positions resulting from the general growth and increasing diversity of the market.”
Non-deliverable forward volumes fell to an average daily turnover of US$3.8 billion, a 31% decrease compared to 2011. Non-deliverable FX options fell to an average daily volume of US$2.1 billion, a 20% decrease on last year.
“As currency controls are eased and offshore liquidity in RMB increases, a shift from non-deliverable to deliverable products can be expected. It is therefore not surprising that trading in the two main non-deliverable forex product lines declined compared to 2011.”
However, growth in non-deliverable interest rate swaps and non-deliverable cross currency swaps was strong, albeit from a relatively low base.
Non-deliverable interest rate swaps grew to an average daily volume of US$100 million, an increase of 380%. Non-deliverable cross currency swaps grew to an average daily volume of US$160 million, an increase of 220%.
“In addition to the expected trend away from non-deliverables as offshore liquidity increases, there has been a feeling among some investors that the official fix against which non-deliverables are settled is not as reflective of the actual onshore spot market as it could be,” said the report.
“This, combined with the convergence of onshore and offshore rates, has meant that they have chosen the use the offshore deliverable market rather than non-deliverable products. Banks expect this trend to continue.”