By Lynette Khoo
SINGAPORE - London and Singapore are seen as frontrunners in the race for a bigger slice of the yuan business as the Chinese currency continues its internalisation path.
Both cities have made clear their ambitions to become an offshore yuan hub after Hong Kong.
While Singapore is inching closer to its goal to host a yuan clearing bank, London also appears to be gaining pace and is seen by some observers as having greater potential to be the second largest offshore yuan market after Hong Kong.
Singapore, however, will play a major role of providing yuan services to South-east Asian countries, noted Deutsche Bank in a recent report.
Latest estimates by the Monetary Authority of Singapore (MAS) show that there are some 60 billion yuan of deposits in Singapore. As a major wealth management centre, investors here have snapped up 30 per cent of total yuan bond issuances so far, reflecting strong interest for yuan-related offerings here.
London's pool of yuan deposits appears to have grown at a faster rate and is estimated to be in excess of 109 billion yuan, according to global consultancy firm Bourse Consult.
It has also stolen a march on Singapore by being the first offshore market after Hong Kong to launch a yuan bond in April. London's spot yuan index trading now represents 26 per cent of the global offshore yuan spot forex market, after Hong Kong's 56 per cent share.
The study by Bourse Consult shows that for the first time, a broad range of yuan-denominated products and services for the retail, corporate and institutional and interbank markets is on offer in London.
The firm noted that London has the advantage of an international reach, a timezone that overlaps with that of China and the rest of the globe, and long experience in creating market benchmarks such as exchange rate fixes and interest rates. It could also build on its strength as a centre for bond issuance.
At the fourth China-UK Economic and Financial Dialogue in September 2011, both countries agreed to enhance financial cooperation and support the expansion of each other's financial institutions.
However, Jing Ulrich, managing director and chairman of Global Markets, China, at JPMorgan, said that while London has its advantages, other cities like Singapore and Taipei have the potential to compete given their geographical and cultural proximity.
"Notably, Singapore is the key trading hub between China and the Asean region," she added.
The Singapore government has recently announced that under an enhanced free trade agreement, two Chinese banks would get full banking licences to operate here, of which one will clear yuan transactions for the local banks.
In turn, China will "expeditiously process" applications by Singapore banks to open branches and sub-branches in China.
The MAS told BT earlier in e-mail correspondence that it was still in discussion with its Chinese counterparts to designate a yuan clearing bank here.
Having this will enable Singapore banks to directly access onshore yuan instead of routing transactions via Hong Kong or commercial banks on the mainland.
"The continued expansion of cross border trade between Asean and China will fuel greater yuan trade settlement activity in Singapore over time," an MAS spokesman said. Asean is China's third largest trading partner, with trade between China and Singapore accounting for a quarter of the China-Asean trade.
Singapore figures prominently after Hong Kong in yuan trade settlement, accounting for 20 per cent of all yuan letters of credit (LOCs) issued by banks in China, compared to some 54 per cent for Hong Kong. Currently, just 0.24 per cent of China's total trade is settled in yuan.
The emergence of Singapore and London as offshore yuan centres comes as yuan internationalisation gathers pace.
And Hong Kong will power ahead further - China is encouraging foreign firms to conduct yuan-denominated trade and investment settlements in the territory - a move that could boost yuan deposits and loan demand in the city. The People's Bank of China (PBOC) is also reportedly planning to set up a fund to provide yuan loans to foreign investors in Hong Kong. A separate pilot scheme allowing mainland residents to conduct foreign direct investment via Hong Kong is also likely to be approved soon.
"Amid deep concerns about the European debt crisis and lingering US fiscal deficit problems, China has recognised that investing in paper money or treasuries brings exposure to significant currency risk," Ms Ulrich said.
"At the same time, China is carrying out financial sector reforms at a prudent pace, so as to set the stage for capital account liberalisation and further the process of interest rate liberalisation," she added.
Deutsche Bank noted in its report that policies to promote Hong Kong as an offshore yuan market should support both yuan repatriation and external circulation.
It estimates that yuan deposits in Hong Kong will likely rise to 2.5 trillion yuan by 2015 and daily yuan forex transactions to 100 billion yuan, while the size of the yuan bond market in Hong Kong could grow from about 300 billion yuan to 1 trillion yuan by 2015.