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Hong Kong’s offshore RMB dominance to remain, says DBS

24 Jun 2012

London is forging ahead with steady efforts to develop its renminbi infrastructure and banking services, but the scope of the hub is still limited when compared to Hong Kong’s, believes the bank.

Compared with London, Hong Kong possesses unique geographic and political advantages when it comes to being an offshore renminbi hub.

China’s 12th Five-Year Plan states that Beijing is in full support of Hong Kong’s development as an offshore renminbi centre, highlighting its prominence in the process of renminbi internationalisation, says DBS in a report released on June 22. The bank believes Hong Kong will remain the leading offshore renminbi centre and will be complimented rather than rivaled by other countries as the market develops.

“Beijing wants to relax the currency controls without creating unforeseen negative consequences,” said Nathan Chow, analyst at DBS in the report. “Hong Kong, as a Special Administrative Region in China under the framework of one country two systems, serves this goal well.”

“Meanwhile, give that the renminbi has long been accepted as a method of payment in Hong Kong, there was a significant accumulation of renminbi in cash well before the official launch of offshore renminbi business,” he added.

For example, London’s financial activity is the renminbi is still limited compared to Hong Kong. Of London’s Rmb109 billion (US$17.1 billion) deposits, Rmb74 billion are interbank deposits and only Rmb35 billion are customer deposits, compared to Hong Kong’s notable Rmb550 billion.

Moreover, only two-thirds of the banks surveyed offer retail renminbi accounts and none offers a credit card or traveler’s cheque facility in renminbi, says the report. Forty-five percent of those surveyed offer deposit facilities in the Chinese currency for their corporate clients, a relatively low share compared to that of Hong Kong.

In spite of London’s notable development in interbank and institutional business, the average daily volume for spot renminbi foreign exchange (FX) of US$680 million is still less than half of Hong Kong’s US$1.5 billion.

“Europe lacks a natural customer base for renminbi financial products and services,” said Chow. “Investors have limited incentive to hold the renminbi because the currency has been depreciating against the euro most of the time in the past 10 years.”

The Chinese currency is currently the world’s 16th largest payments currency, with a market share of 0.4%, according to data from Swift. Considering China’s share of 9.6% in world trade in 2010, the renminbi is underutilised at an international level, adds DBS.

Given the significant difference in time zone, London’s role is complementary to Hong Kong by allowing longer trading hours for business in Europe, the Middle East and Africa, and beyond.

“If the renminbi is to become a truly international currency in the longer-term, acceptability of it by other countries as a trade settlement currency is the most important pre-requisite,” said Chow. “This is where other major international financial centres like London can contribute.”

24 Jun 2012