Singapore will become one of four cities to have an offshore yuan clearing centre. But its game plan is longer-term: to make itself a hub in all yuan-related transactions, so it has a clear advantage when the yuan becomes a global currency
By Grace Ng, The Straits Times, 5 Mar 2013
NEWS on Feb 8 that Singapore will join Hong Kong, Taiwan and Macau in having a yuan clearing bank was met with some excitement.
Since the Chinese currency is not convertible and tightly controlled, people who want to trade in offshore yuan need to have the unit cleared through Bank of China (BOC) branches in the three cities in Greater China. The Chinese state giant Industrial and Commercial Bank of China (ICBC) was given the go-ahead last month to clear offshore yuan transactions in Singapore.
But the buzz was quickly followed by the observation that Singapore's advantage will dissipate once the Chinese currency becomes convertible as expected after 2015, when no interim offshore centres are needed.
So should Singapore rush to grab as much offshore yuan deposits as possible to maximise its two-year window?
Some analysts say a longer- term look suggests there is no need to rush. That is because it can set its sights on longer-term gains beyond being just an offshore yuan trading centre. Its ultimate aim is to win market confidence as the best platform for yuan-denominated trade and products, especially for Asian markets - even when investors can access the yuan anywhere.
Appeal of third parties
MAJOR financial centres like London and Singapore now funnel yuan-denominated transactions through Hong Kong.
Once it hosts its own offshore clearing bank, Singapore can boost its appeal and prestige as a financial hub by building up its own pool of offshore yuan liquidity and issuing yuan- denominated financial products.
The benefits of this move can persist in the long term, even when the yuan becomes convertible, if it can capitalise on its potential as a key platform to support "third party usage" of the yuan. This refers to yuan-denominated transactions between foreign parties not involving China.
For instance, an Indonesian mining company may receive payment for its goods from a Malaysian customer in yuan if both sides find that using Singapore as a conduit to do so cuts their transaction costs or helps them manage currency risks better.
So Singapore will have to develop the infrastructure and services to make it attractive for them. This model differs from that of Hong Kong and Taiwan, whose offshore yuan business is largely driven by their trade and investments with the mainland.
"For a currency to become truly international, expanding third- party usage is important," said DBS economist Nathan Chow.
Already, the yuan's use in global transactions is rising, and overtook the Russian rouble recently.
"Given the acceleration in RMB payments, it will be interesting to see if the RMB displaces the Thai baht in the coming months," said Ms Lisa O'Connor, global RMB director of financial messaging platform Swift. The baht is ranked No. 10 as a global payments currency, while the yuan, also known as the renminbi or RMB, is No. 13 and the rouble is No. 15.
Singapore has a head start over bigger financial hub rivals like London in winning more business as the yuan internationalises. By hosting ICBC as a clearing bank, it can attract firms that already settle deals with Chinese players in yuan, and investors keen to buy more yuan bonds and securities. Many of these are keen to diversify into another market outside China's sphere with a stable offshore yuan trading environment and strong banking secrecy rules.
ICBC will also allow them to manage risks by offering an alternative conduit to BOC. The latter - the sole yuan clearing bank in the world until now - encountered market disruptions in Hong Kong in the past when strong demand caused it to hit daily yuan quotas.
Gateway to Asean
MORE importantly, Singapore was picked by Beijing ahead of other overseas forex hubs because of its potential to attract new yuan users in South-east Asia.
The world's No.2 economy is eager to encourage traders and investors in the region, where it has key strategic interests, to switch from the US dollar to the yuan.
After all, Asean did US$401 billion (S$500 billion) worth of trade with China last year. Its trade surplus allows its companies to accumulate offshore yuan even faster, which they could potentially use in third-party transactions.
Much of Asean's exports to China are key resources such as oil and timber. Singapore, as a gateway to Asean and a commodities hub, could provide a platform for the region to trade these products - and more - in yuan, noted Moody's Analytics economist Alaistair Chan.
Yuan deposits
IT IS anyone's guess if all this would still be a pipe dream rather than the new trade order in 2015. Some, like OCBC chief executive Samuel Tsien, have warned it will not be easy, given that the yuan is still not "a natural currency" for Singapore or the region.
And the strong Singdollar reduces the incentive for investors in Singapore hoping to make gains on a rising Chinese currency by holding yuan deposits and bonds.
So Singapore's deposits, especially from retail investors, may not grow fast at the start, OCBC economist Xie Dongming noted.
This year, analysts expect the yuan to rise about 2 per cent against the greenback and fluctuate more. But this could actually encourage more firms to take offshore loans in yuan rather than in other currencies.
Yuan financing previously saw slow growth in Hong Kong, when the currency was a one-way appreciation bet, especially in 2011 when it rose over 5 per cent.
Singapore has deposits of 90 billion yuan (S$18 billion), estimated Deutsche Bank economist Liu Linan. How fast this swells when ICBC kicks off its operations may be compared to the growth rate in Taiwan, which amassed 1 billion- plus yuan in deposits just two days after its start on Feb 6.
Taiwan could cross 140 billion yuan in one year, say analysts.
While a growing, liquid offshore yuan pool is important to support the market, Singapore should not be unduly panicked even if its deposit growth does face a slow start. Its bigger preoccupation is to educate and encourage the region to accept the use of the yuan in trade and to offer a broader range of yuan products as a private banking and forex hub.
Local and qualifying full banks have already been reaching out to their Asean customers.
"But it is a slow burn process," said UOB economist Suan Teck Kin, citing a Chinese proverb wan shi kai tou nan ("the first step is the most difficult").
Indeed, DBS' Mr Chow sees third-party usage of the yuan as more of a "long-term goal".
Still, slow but steady is not a bad thing. The Monetary Authority of Singapore risks losing market confidence if accelerated yuan trading or hasty launches of sub- standard products were to cause problems. And investors need to be well-educated about benefits and risks before they can tap the offshore yuan market effectively.
Singapore may also take a leaf from London's book.
The world's largest forex hub is focused less on getting its own offshore yuan line. Its priority is to promote itself in the West as the leading centre for the yuan when it becomes one of the top three units over time, say analysts.
"I don't think London is so desperate to have a clearing bank designated here," said Ms Janet Ming, who heads Royal Bank of Scotland's China desk in London. "What the UK government wants is to leverage Hong Kong's (clearing line) so banks in London could provide immediate RMB services while waiting for it to become fully convertible."
London already has the largest share of the world's yuan payments outside China and Hong Kong, at 28.3 per cent.
Singapore is second, with 22.7 per cent. How fast it can grow its share will depend on whether it can use its advantages, including its early start in the third-party yuan business, to position itself for the day when the yuan is convertible, and a global currency.
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