Singapore takes step toward becoming offshore yuan center

Singapore took a step closer to becoming a financial hub to trade using China’s renminbi, following in the footsteps of rival Hong Kong, which has seen explosive growth in its own offshore yuan market in the past year.

China’s central bank is considering naming Bank of China (3988.HK) (601988.SS) or Industrial and Commercial Bank of China (ICBC) (1398.HK) as a central clearing institution for yuan-denominated trade in Singapore, Singapore’s Straits Times reported on Tuesday.

The development in the city state noted for being a major trade redistribution center in Asia along with news on Monday that China and New Zealand set up a 25 billion yuan ($4.78 billion) bilateral currency swap deal were signs the world’s second largest economy is keen on speeding up the international use of its still unconvertible currency.

 

China began allowing its currency to be used to settle international trades in 2009 through a scheme involving several Chinese cities along with Hong Kong, Macau and various Southeast Asian countries, including Singapore. The scheme was extended to the rest of the world in 2010.

 

Hong Kong is, however, currently the only place outside China where yuan trades can be settled via a Chinese bank. That is one of the main reasons why CNH, or offshore yuan in Hong Kong, trading volumes have surged and are expected to hit US$1 billion ($1.25 billion) a day this year.

 

“China needs more such centres after first data showed a slowdown in the pace of shift of China’s trade to yuan, and Singapore needs the ability to clear trades in order to compete with Hong Kong,” said Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole in Hong Kong.

 

“Such a development would be in line with our expectation of China establishing more yuan offshore centres to speed up the process of yuan internationalization.” he added.

 

The Wall Street Journal, citing unnamed sources, reported last week that China was weighing steps to expand trading of its currency outside the mainland and may select Singapore as a second yuan-trading hub after Hong Kong.      

 

Monetary Authority of Singapore (MAS) Chairman Goh Chok Tong told reporters in Beijing that the People’s Bank of China (PBOC) will soon pick an approved Chinese bank in Singapore to clear yuan trades.

 

PBOC may also give MAS a qualified foreign institutional investor (QFII) licence to invest in onshore Chinese financial products, Goh said.

 

Approval of such a license would allow financial institutions in Singapore to attract investors with the prospect of being able to invest directly in mainland Chinese markets. China’s capital account is largely sealed, preventing foreign investors from gaining exposure to the fast-growing economy.

 

MAS already has a $30 billion currency swap agreement with China to ensure yuan liquidity in Singapore.

 

HONG KONG’S “CNH” MARKET TO STAY DOMINANT

Analysts said that while Singapore will likely grab a large slice of the fast-growing offshore yuan business, the PBOC will ensure that Hong Kong, a special territory of China, remains the paramount centre, a view that Goh also expressed.

 

“We have no ambition to try and rival Hong Kong. Singapore cannot rival it because Hong Kong is part of China. It is close to China; it has got much more trade with China,” the Straits Times newspaper quoted Goh as saying on Tuesday.

 

Goh, Singapore’s former prime minister, said that the city could play a primary role in facilitating yuan-denominated trade between China and the countries of Southeast Asia and India.

 

The Straits Times said the designated Chinese bank for clearing yuan trades in Singapore was likely to be either Bank of China (3988.HK) (601988.SS) or Industrial and Commercial Bank of China (ICBC) (1398.HK).

 

The Business Times newspaper noted ICBC recently set up a yuan-processing centre in Singapore for Southeast Asia. ICBC is lobbying hard to become the yuan clearing bank for Singapore, a source told Reuters.

 

Singapore is Asia’s trading hub for many of the commodities that China imports. More than 3,000 mainland firms operate in the city and the offshore arm of China’s CITIC Bank (0998.HK) (601998.SS) said recently it saw great potential for developing a yuan business in Singapore.

 

The city-state is also the world’s fourth largest forex trading centre, behind New York, London and Tokyo but ahead of Hong Kong and Sydney.

 

While there is no official data on the amount of yuan deposits held in Singapore, the city-state’s three big lenders DBS (DBSM.SI), Oversea-Chinese Banking Corp (OCBC.SI) and United Overseas Bank (UOBH.SI), all offer yuan deposits.

 

Singapore is also Asia’s biggest hub for private banking and investors have access to several funds that invest yuan-denominated bonds as well as shares listed on the Shanghai and Shenzhen exchanges.

 

Separately, a HSBC (HSBA.L) spokeswoman in Singapore told Reuters the bank has to-date raised over 1.5 billion yuan in yuan deposits in the Southeast Asia city-state.

 

Hong Kong currently dominates the offshore yuan market, thanks to large pool of 408 billion yuan of deposits in the territory as of February and the slew of yuan-denominated bonds issued in Hong Kong by Beijing and various Chinese firms.