London and Singapore will emerge as the two dominant offshore RMB hubs alongside Hong Kong by 2020, according to BNY Mellon.
Competition for offshore renminbi (RMB) business is getting fiercer as financial centers seek to grab a share of the pie and capitalize on Beijing's ambition to make the RMB a global currency. With billions of dollars in transaction and servicing fees up for the grabs, the race is on.
“The impact the continued internationalization of the RMB will have on the global monetary landscape cannot be overstated," Fred DiCocco, Asia-Pacific Head of Sales & Relationship Management for BNY Mellon’s Treasury Services business.
DiCocco explains that around 20% of China’s US$4 trillion in annual foreign trade is conducted in RMB today, a figure which could surge to over 30% as early as next year and see the RMB become one of the top three global trade currencies.
"It would not be naïve to suggest that it could rise to as much 50% by 2017," says DiCocco in a commentary.
Hong Kong is still the undisputed number one offshore RMB payments center with a 71% market share, but its leadership position is slowly eroding having dropped by around 10% over the last three years with London and Singapore both establishing themselves as strong alternatives.
"Whilst their market shares are minor when compared with Hong Kong today, languishing in single digits, I expect we will see both centers surge forward and break away from the rest of the pack over the next few years. By 2020, it is possible we will see London and Singapore join Hong Kong to form the top three RMB offshore centers by market share," notes DiCocco.
With China-EU trade representing the second largest global economic co-operation pact, and with more than 40% of all global foreign exchange (FX) trading taking place in London, it was no surprise two years ago to see London take the initiative to position itself as the main offshore trading center for RMB.
London quickly rose to a commanding position and assumed the second largest center in respect of market share.
Many expect Singapore will play a similar role in RMB trading as China gradually opens up its capital markets and liberalizes its currency. Singapore’s rapid ascendancy has been fuelled by the fact that offshore RMB growth to date has been driven primarily by trade finance settlement.
"With Singapore as the main trade finance hub for Asia-Pacific, and the predominance of intra-Asia trade, it is not surprising to see Singapore proving an attractive center for offshore RMB payments too," says DiCocco.
Singapore had a small head start over London in already having an infrastructure to process and provide easier access to RMB locally in the form of a nominated clearing bank – China’s state-owned ICBC.
While London and Beijing have also signed an agreement to set up an RMB clearing bank in London, no institution has yet been named.
Despite the competition between the two financial powerhouses, Singapore and London have agreed to co-operate on further development of offshore RMB through a new ‘UK-Singapore Financial Dialogue’ agreement between the two countries.
“That said, neither London nor Singapore can become complacent and assume they are guaranteed market leadership. Countries that have traditionally had strong trade or investment ties with China, such as Korea, Germany and France, are also seeking to be at the heart of RMB offshore trading and have a strong case," notes DiCocco.
"Only time will tell who the winners will be, but I believe by 2020 we will see a three-horse race between London, Singapore and Hong Kong for supremacy, with Hong Kong probably continuing to lead the way.”