Fraser, who is driving the city’s campaign to make it a renminbi hub, adds that London will continue to rely on Hong Kong to provide its currency-conversion services to the city’s banks. “We’re using Hong Kong’s [clearing infrastructure] and intend to continue to do so,” says Fraser when asked whether London would seek its own clearing bank, explaining that Hong Kong’s clearing infrastructure is efficient enough to support the needs of London while it continues to develop its offshore renminbi trading capabilities.
“We said we would use Hong Kong for [clearing] because we didn’t see any point in replicating a system that works perfectly well.”
The news comes one week after the city announced that a committee of London officials and Europe- and China-based banks would assess ways to promote renminbi trade, settlement and deposits with the goal of being a global leader of renminbi business.
Yet, Hong Kong bankers question whether the city can meet its goals of becoming a true hub without a clearing bank of its own. This essentially entails that the majority of currency conversion between the city’s banks and their clients will go through the Bank of China (BoC) Hong Kong, which is one of two recognized renminbi clearing banks in the world. The other is Bank of China’s Macau division.
“I would be surprised if London doesn’t seek one because the city does have the eventual plan of being a centre for the currency,” says a head of foreign exchange (FX) research at a bank in Hong Kong.
“As this currency gets bigger and becomes more global in its nature, it will need to have the facilities that other currencies have, which includes more direct ways to exchange it into other currencies. Maybe for the time being, while London is still enhancing and building its infrastructure, clearing through Hong Kong makes sense. But if the depth of the currency expands, we cannot expect this model to be enough.”
Analysts explain that a clearing bank would give the city the autonomy to oversee its own renminbi operations without depending on Hong Kong and its rules. It would also signify that Beijing, which verbally threw its support behind London in September, officially recognizes city’s independent goals of being a trade centre for the currency.
BOC Hong Kong has a quota of Rmb8 billion ($1.27 billion) per year to exchange renminbi for global clients. This figure can be adjusted by China as needed each quarter.
Global clients, which largely comprise banks, can sign a bilateral agreement with BoC Hong Kong to set up an account that gives them access to the bank’s clearing services. Otherwise, global banks with branches in Hong Kong can indirectly tap the city’s renminbi clearing platform.
Each of these processes is a roundabout way to clear transactions, and is dependent on Hong Kong’s business hours.
However, Fraser notes this is not a problem for London. From June, the Hong Kong Monetary Authority (HKMA) will extend the hours for its clearing business to 15 hours from 6:30pm to 11:30pm to accommodate global demand for clearing. This assures that London banks can access Hong Kong’s clearing platform throughout its working day.
Fraser further explains that, while the city develops its capabilities for the currency, London’s renminbi trading “is obviously a relatively small business at present, though growing strongly”, and London’s won’t require a clearing system of its own.
The City of London released figures on April 18, that the number of offshore renminbi deposits sitting in London banks is Rmb109 billion. While Fraser says the city aims to expand that figure as its banks are able to process a greater amount of trade in the currency, Hong Kong remains the most sophisticated centre for trade, given its lengthy experience dealing in it.
Comparatively, HKMA figures show that Hong Kong has Rmb566 billion sitting in deposits.
The relationship between the two cities is poised to strengthen in the next month when finance officials from London and Hong Kong meet in Hong Kong to align their renminbi processes. This is also an opportunity for London to learn the ropes of renminbi clearing from Hong Kong.
While London continues to get its renminbi processes up to speed, Hong Kong bankers can see why its system does not require a clearing bank of its own.
“There are multiple ways to getting around having your own clearing bank, and while it’s easier to have one onshore – and more complicated to route through an offshore clearing bank – it’s not a prerequisite to expanding your renminbi business,” says one Hong Kong credit analyst. “The big thing is to bridge the time difference between cities, which has been done.”
She adds that China would also prefer to limit the amount of clearing banks globally in an effort to control flow of renminbi globally. With this mentality, China would look to make the global clearing process out of Hong Kong as efficient as possible.
And with the expectation that the renminbi will be become liberalized – and thus more easily convertible – the rigidity around clearing will minimize and become easier for global investors.
Yet, even then, London might need its own clearing bank to accommodate the volume of its renminbi trades – one day.
“The market sees it as an eventual step to create more clearing banks as the renminbi internationalizes,” concludes one head of FX research at a bank in Hong Kong. “China wants to build depth and liquidity – we interpret that as needing more ways to convert the currency.”