Emerging Markets: swap line shows growing internationalization of RMB

Emerging Markets World Bank editions, October 2013

A new swap line between the European Central Bank and the People’s Bank of China underlines the growing international use of the Chinese currency.

The three-year bilateral currency swap line, which will be up to RMB350 billion and Eu45 billion, reflects “rapidly growing bilateral trade and investment between the euro area and China, as well as the need to ensure the stability of financial markets,” the ECB said in a statement. Europe accounted for 14% of Chinese trade in 2012, according to HSBC.

The announcement follows the release of data this week demonstrating that there is more activity in offshore RMB in Europe than in Asia outside of China and Hong Kong.  Data from SWIFT showed that 62% of FX trading confirmations in RMB were conducted in the UK in the year to September, up from 54% in 2012, with France accounting for a further 10% and Switzerland 6%. At the same time, Singapore’s share dropped from 14% to 9%.

“Given the significance of the Eurozone, today’s agreement is another major step forward in the RMB’s internationalization process,” said Ju Wang, senior FX strategist at HSBC, although she noted the market had expected to se a larger FX swap between the two central banks.

“FX swap lines between PBOC and other central banks will become increasingly common. And the size of these FX swaps will likely get bigger over time.”

Wang said she expected to see more such ties with the Americas, since the only one in place today is with Brazil, for whom China is the number one trading partner. In an illustration of the RMB’s reach into that region, this week Citi Peru became the first bank in Latin America to issue letters of credit in RMB.

European issuers are also becoming more commonplace in the dim sum bond markets, in which RMB are raised offshore, usually in Hong Kong but increasingly London too. Total for example, raised RMB1 billion in Hong Kong in September, while HSBC launched the first dim sum bond in London and has been followed by Lloyds TSB, BP and Morgan Stanley, among others.

SWIFT also says that the RMB is now the 8^th most traded currency in the world. London is achieving RMB volumes of around $5 billion a day, double the amount a year ago; by comparison, Hong Kong has moved from $8 billion to $13 billion in the same period, reflecting 113% growth in overall RMB trading volumes so far this year, Swift said.

While the data looks alarming for Singapore on first glance, economists in Asia argued that the city state has strengths in other areas.  “Singapore has been doing well in deposits, and London has had impressive growth in FX turnover,” said Kelvin Lau, senior economist at Standard Chartered, adding that Singapore’s strength in asset management would prove important.

To Singapore’s benefit, he said, “we are very optimistic on the China-Asean trade corridor. Also, if you look at the migration of operations out of China to southeast Asian economies with cheaper labour costs, that is leading to even stronger trading linkages. It will be more natural for them to use RMB rather than a third party currency to settle trade.” Trade settlement, he said, “still has plenty of room to grow. Right now only 14% of China’s trade is settled in RMB; we expect to be talking about 30% by 2020.” In addition to Singapore, direct settlement in RMB can also take place in Taiwan.