The private-sector led London-Hong Kong Forum to promote cooperation on development of international renminbi (RMB) business (the “Forum”) convened for its second meeting today (Tuesday). The meeting was attended by senior representatives of the London and Hong Kong offices of ten banks, namely Barclays, Bank of China, China Construction Bank, Citi, Deutsche Bank, HSBC, Industrial and Commercial Bank of China, J.P. Morgan, Royal Bank of Scotland, and Standard Chartered Bank. The UK Treasury and the Hong Kong Monetary Authority acted as facilitators. The Bank of England and Financial Services Authority attended as observers.
The Forum participants reviewed the latest developments in the international RMB market. Activity has continued to broaden and deepen in both London and Hong Kong with turnover rising in a number of market segments. One indicator is that daily turnover in Hong Kong’s RMB Real Time Gross Settlement system, which serves the global RMB market, has reached RMB 250 billion. Significant progress was also reported in taking forward the action items agreed in the last meeting, including;
- Banks have sought to raise awareness of corporates regarding the use of RMB, both individually and collectively, and through collaboration by their Hong Kong and London offices. The City of London RMB Initiative has recently launched a number of publications describing opportunities in the international RMB market, including most recently a series of corporate case studies. All these efforts have contributed to a significant increase in interest from corporate customers in using RMB to conduct trade and investment transactions with Mainland China and survey evidence suggests that corporates are finding it easier to access overseas RMB products and services. There has also been a substantial increase in RMB corporate accounts and foreign exchange trading in both the London and Hong Kong markets over the course of this year;
- Banks in London and Hong Kong have been taking advantage of the lengthened operating hours of the RMB RTGS system in Hong Kong, by extending their internal cut-off times for handling RMB transactions with customers and other banks. The operation has been smooth, with average turnover during the late operating hours providing an additional RMB 2 billion per day. This is important for the settlement of offshore-offshore transactions, notwithstanding that market liquidity and payments with Mainland China are still constrained during these hours;
- Meanwhile, eight banks joined (and more are in the process of doing so) the cross-border collateral management system developed by the Central Moneymarkets Unit of the HKMA, JP Morgan and Euroclear, and the first RMB repo transaction was conducted on 3 December. Additionally the Central Moneymarkets Unit of HKMA is working to launch a similar service on the Clearstream platform in the first quarter of 2013 to facilitate cross-border repo transactions;
- Cross-border interbank RMB activities between Hong Kong and London have been developing progressively, deepening the integration between the two markets. London now accounts for the largest amount of RMB payments conducted with Hong Kong and Mainland China, as shown by the data released by SWIFT most recently; and
- All Forum banks have started to provide direct foreign exchange quotes of RMB to clients against GBP, Euro and a number of other currencies. A number of banks have also launched various benchmarks and indices to facilitate investments in the offshore RMB market. Certain standard market documentation (such as ISDA agreements) have been enhanced to cater for RMB transactions.
Looking ahead, the Forum participants agreed that the offshore RMB market is set to expand further, and that it is essential that banks continue to enhance their services to customers to facilitate wider participation. It is a positive development that a growing number of corporates, financial institutions and sovereigns in different parts of the world are engaging in RMB business. However, to ensure the efficient intermediation of RMB funds, it will be critical for the international RMB market to develop further as an integrated market and to avoid the risk of fragmented liquidity, particularly when considering the development of settlement arrangements. To promote wider use of RMB by corporates and financial institutions, Forum participants would welcome further enhancement of the arrangements for two-way cross-border flows of RMB between the onshore and offshore markets. This will support RMB financial activities in the offshore market including the build up of a broad range of RMB assets. At the same time stronger business links between financial institutions in different financial centres should be fostered.
The Forum participants agreed to continue with the tasks in respective areas that have been initiated since the last meeting, and to supplement such on-going efforts with additional action items as follows;
- To expand marketing initiatives, focusing on providing more tailored services and advice for more European corporates to facilitate their use of RMB in trade settlement and investment and to extend this work to other markets including Latin America, Africa and the Middle East;
- To explore, as the offshore RMB market expands and deepens further, appropriate market solutions that can enhance RMB liquidity beyond Asian trading hours. This would include adjustment of internal systems, further development of standardised documentation, signing of agreements with further counterparties, and making fuller use of the cross-border collateral management arrangements that are available. It was noted that the official sector should not act as a substitute for market mechanisms. To this end, institutions holding RMB surplus funding and those in need of RMB funding should expand their network of relationships, while repo transactions may act as an additional funding means besides foreign exchange swaps;
- Forum participants noted that existing solutions to mitigating RMB foreign exchange settlement risk, including the Hong Kong Payment versus Payment arrangements and counterparty limits are currently working well. However, taking into account growing foreign exchange turnover in relation to their foreign exchange settlement risk limits, they agreed to accelerate work to investigate further medium and long term solutions to addressing foreign exchange settlement risk through global best practice, including an increased use of bilateral netting and existing or new organised settlement arrangements for foreign exchange transactions. Forum participants will also follow closely the development of the Cross-border Interbank Payment System (CIPS);
- To facilitate further market development and improved transparency, Forum participants agreed to increase the provision of market information, by enhancing the range and frequency of public data that is available; and
- The Forum participants welcomed the increasing number of banks contributing offshore RMB interbank rates, as published on the Hong Kong Treasury Markets Association website. They agreed that it would be important to develop credible and well founded interest rate fixings for the offshore RMB market’s future growth.
Following this meeting of the Forum, a special session on the use of RMB by corporates will be held tomorrow. It will be attended by over sixty corporate treasurers discussing the experience of European companies in denominating trade with China in RMB and the wider array of RMB products and services available in the global market.
The next meeting of the Forum will be convened in the course of 2013.