Next Stop For The Yuan’s Global Journey: Canada, Middle East

Even as China quickly expands the use of its currency to financial hubs in Asia and Europe this year, bankers are already looking to Canada and Middle East as the next growing regions for their offshore yuan buinsess.

The moves are in line with Beijing’s ambition to promote its currency to more international investors and eventually turn the “redback” into a global reserve currency, while at the same time expanding its already considerable political and economic clout.

“There is big potential in the Middle East and Canada in terms of where’s next for offshore yuan development, and the needs there are quite balanced between trade and investment,” Candy Ho, global head of RMB business development at HSBC told Reuters.

“In the Americas, Canada is a bit ahead of the United States. Canada’s pension funds, especially from the West Coast, are looking to access China,” Ho said.

Indeed, Canada is making efforts to beef up its offshore yuan business. Chinese media reported earlier the government is studying how to set up a yuan clearing centre with the private sector, and hopes to see some progress later this year.

The Canadian province of British Columbia completed its second offshore yuan debt issuance worth 3 billion yuan ($490.94 million) on Wednesday, which saw strong demand from central banks.

Issuance from sovereign and supranational issuers is rare in dim sum market and usually draws lots of orders from central banks, which in turn pushes the Chinese currency a step ahead on the road to becoming a global reserve currency.

Some banks are strengthening their presence in China in anticipation that offshore yuan business will take off in the Americas.

“In North America there is an increased focus on transactional banking involving RMB payments. We have hired a head of FX in China which will help us find global RMB FX solutions for our clients,” Gerrard Katz, head of Asia foreign exchange trading at Scotiabank, Canada’s third largest lender.

And the business interest goes both ways.

Industrial and Commercial Bank of China has won approval to be the yuan clearing bank in Singapore and Luxembourg.

“For the next step, we will try to make breakthroughs in the Americas,” said Wu Bin, general manager at ICBC’s International Banking Department.

By establishing new clearing hubs in more cities, Beijing hopes to persuade more foreign companies settle trade deals in yuan and to switch their invoicing to the yuan, also know as the renminbi. Having clearing banks reduces the cost of making payments, makes trades more efficient and reduces currency risk.

Use of the yuan is also percolating into the Middle East at a quicker pace, with China’s Agricultural Bank selling the first offshore yuan bond in Dubai in September, offering investors there access to yuan assets.

The People’s Bank of China and the Central Bank of UAE signed a 35 billion yuan currency swap agreement in 2012 and some Middle East countries have announced or indicated plans to diversify their currency reserves into the yuan.

“The Middle East is looking quite closely at the development of China and access to China. There is evidence of increasing demand for Chinese assets, whether it’s for offshore or onshore bonds given a lot of money there is looking for diversifications,” said HSBC’s Ho.

In June, the yuan reinforced its position as the seventh most active currency for global payments and accounted for 1.55 per cent of payments worldwide.

HSBC expects the yuan to be fully convertible within two to three years. It had predicted last year that the currency would become fully convertible within five years.