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A Singapore CNY hub would benefit China’s FX reserves

18 Apr 2011

The South-east Asia city state could well become the next hub for offshore renminbi trade settlement, a move that would help ease China’s FX reserve burden. However, Beijing still needs to see more onshore exporters trading in renminbi.

Opening up Singapore as another offshore renminbi trade centre should ease China’s foreign exchange (FX) reserves problem, strategist in the region agree. The thoughts comes as news emerges China will soon appoint a Chinese bank to settle renminbi in Singapore.

The Peoples’ Bank of China (PBoC) will soon pick an approved Chinese bank to clear renminbi trades in Singapore, Goh Chok Tong, chairman of the Monetary Authority of Singapore, told the Singapore Business Times today (April 18).

At present, the only offshore hub where this can happen is in Hong Kong. Having a clearing bank domiciled in a country gives the local banks the ability to accrue greater reserves of renminbi and provides a wider avenue for renminbi to be traded.

The timing of the news in Singapore makes a lot of sense. Yesterday (April 18) Zhou Xiaochuan, central bank governor for the PBoC, said the country was in need of reducing and diversifying its vast FX reserve holdings, which have risen by a further US$200 billion during March to hit US$3 billion.

This vast amount of money—which is still rising—has built as a consequence of the PBoC buying up most of the US dollars flooding into China at a set rate. It does so in order to protect the Chinese government’s preferred valuation of the renminbi against other currencies.

One way of reducing the need of the PBoC to so aggressively intervene in the FX market is if more trading was to be conducted in renminbi, hence Beijing’s desire to internationalise the currency.

To that end, allowing more financial hubs to settle in the currency makes sense.

“[A] way to slow down the build up of reserves is to continue shifting trade to be settled in renminbi, [the news from Singapore] plays into such outlook,” said Dariusz Kowalczyk, economist at Crédit Agricole CIB.

The major problem facing China is convincing the customers of its exporters to pay for their trades in renminbi. If it can convince more to do so it would reduce the amount of foreign currency entering China, and therefore the amount the PBoC has to sterilise.

More offshore renminbi hubs would in theory help those efforts, as they would improve the ability of other countries to pay for Chinese imports in the currency.

“To date, most of the renminbi trade settlement is still for China's imports. So until we see a shift towards renminbi payment for China's exports, the rapid pace of FX reserve accumulation is hard to stop....renminbi is net flowing out of China,” said in Pin Ru Tan, local markets strategist at Royal Bank of Scotland.

Meanwhile more of China’s FX reserves could put to work through investment agencies such as China Investment Corp. (CIC), the country’s sovereign wealth fund, Zhou said, after a speech at Tsinghua University in Beijing yesterday (April 18).

The comment would tune in CIC’s Chairman Lou Jiwei, who was recently quoted saying the sovereign wealth fund may get more capital to invest in overseas markets.

18 Apr 2011