Putting Yuan on the Map

　　China takes tentative steps toward internationalizing the yuan

　　On July 3， the People’s Bank of China (PBC)， the country’s central bank， signed an agreement with its South Korean counterpart， the Bank of Korea， on establishing a renminbi clearing arrangement in Seoul to promote the use of renminbi in cross-border trade and investment.

　　Bank of Communications， China’s fifth largest commercial bank， will be the designated renminbi clearing bank in South Korea. This action is just the latest undertaken by the PBC in its campaign to accelerate offshore yuan activities.

　　In June， China Construction Bank， the country’s second largest commercial bank， was appointed the official yuan clearing bank in London， and Bank of China’s (BOC’s) Frankfurt branch was cleared to facilitate renminbi transactions in the German financial hub.

　　In addition， the PBC has signed memorandums of understanding with the central banks of France and Luxembourg to establish such arrangements in their respective capitals.

　　With these memorandums in place， the yuan’s overseas clearing arrangements will cover 10 regions， including Hong Kong， Macao， Taiwan， Singapore， Malaysia， South Korea， the UK， Germany， France and Luxembourg. Deutsche Bank estimated that offshore deposits denominated in renminbi will reach an impressive 2.5 trillion yuan ($406.5 billion) by the end of 2014.

　　The recent renminbi clearing arrangements have been greeted by analysts as a milestone in the internationalization of the Chinese currency. The renminbi is not yet freely convertible under the capital account， so the role the currency can play is limited， said Zong Liang， Deputy Director of BOC’s Institute of International Finance， when interviewed by 21st Century Business Herald. Clearing banks can facilitate and support offshore renminbi transactions through direct cooperation with the PBC， allowing for free and efficient cross-border flow of the currency， said Zong.

　　Zhao Xijun， Vice Dean of the School of Finance of Renmin University of China， said that renminbi clearing system is a type of financial “infrastructure.” Clearance and settlement of renminbi forms the basis for the use of the currency in foreign countries， and the building of this necessary “infrastructure” involves the advancement of various transactions， products and business operations， all factors vital to accelerating the currency’s internationalization.

　　A growing presence

　　Frankfurt is also home to the European Central Bank (ECB)， and the PBC and ECB have also signed a currency swap agreement. “Thus the PBC can now systematically carry out transactions in the eurozone and evaluate the overall clearance and transactions in the zone through cooperation with the ECB and the clearing banks，” Zong said.

　　“Since the euro is the second largest currency in the world， and international financial centers in Europe allow access to vast markets， both the yuan’s internationalization and the innovation of yuan offshore products will be amply facilitated，” he continued.

　　Zong thinks Europe is a region with great potential for the development of a renminbi market. China-Europe relations are currently developing at a rapid pace， providing a good opportunity for Europe to accept the yuan. “This will benefit both sides，” he said.

　　According to Zhao， as Paris， Frankfurt and Luxembourg are regional and international financial centers， their markets will certainly be eager to expand the range of financial businesses， services and products they can offer， as well as to increase the number of financial institutions and clients. Meanwhile， the renminbi is the currency of the world’s second largest economy， and China’s foreign trade， investment and financing activities are becoming increasingly brisk. Therefore， the development of renminbi business in these European cities will help to consolidate their positions as international financial centers， said Zhao.

　　Back in Asia， industrial insiders have speculated that the deal with South Korea means that China is taking the first steps in laying out renminbi offshore centers across northeast Asia. Cooperation between the central banks of China and South Korea has been in progress. China’s first bilateral swap agreement was signed with South Korea in 2008.

　　Trade relations between the two countries have also been close， yielding encouraging signs. In 2013， bilateral trade reached $274.2 billion. Bank of Korea data also showed that South Korean residents’ yuan deposits jumped 70 percent to the equivalent of $11.33 billion in the first five months of 2014.

　　On July 4， BOC also inked memorandums of understanding with Korea Exchange (KRX)—South Korea’s main bourse operator—and Korea Securities Depository (KSD)—the country’s central securities depository. These will enable all parties to cooperate in renminbi clearing； the settlement， development and promotion of renminbi-related financial products； and the pooling of client resources， thus nurturing the development of a local renminbi market.

　　“The cooperation between BOC， KRX and KSD reflects both the collaborative spirit shared by the two countries and the trend toward the renminbi’s internationalization. It will expedite trade and investment between Chinese and Korean enterprises， and promote the construction and development of an offshore renminbi market in South Korea，” said Tian Guoli， Chairman of BOC.

　　Tian said the scope of cooperation between the two nations will expand further and the prospects for bilateral financial cooperation look promising. With the advancement of its internationalization， the renminbi is now widely used in trade， capital settlement and remittances between the two countries， and also has become the second most widely used foreign currency in South Korea.

　　Boosting offshore market

　　Overseas clearing banks serve as a major channel for cross-border renminbi transactions.

　　Zhao stated that the signing of renminbi clearing arrangements is based on common understanding between monetary authorities in China and other countries in establishing， improving and advancing an overall overseas clearing system for renminbi. Such an agreement will increase the number of optional currencies for clearance， increase the efficiency of transactions， reduce the risks of transactions and lower trading costs. “It will also benefit foreign trade companies， investment and financing institutions and other market participants，” said Zhao.

　　According to BOC figures， at the end of the first quarter， Hong Kong was still the largest offshore renminbi center in the world， followed by Singapore. In Europe， the UK is the country with the largest amount of cross-border renminbi transactions outside Asia， Germany is China’s biggest trading partner in Europe and Luxembourg is an important hub for renminbi on the European continent.

　　China is now the biggest trading nation in the world. In 2013， China’s trade in goods amounted to $4.16 trillion and its overseas investment reached $90.1 billion. In the first four months of this year， 17.5 percent of China’s trade in goods was settled in renminbi， and 27.5 percent of its overseas investment was settled with the yuan.

　　In the future， the offshore renminbi market is expected to spread its wings even further.

　　“Clearing banks for renminbi transactions have been expressly designed for these conditions. They will be of undoubted benefit to the development of offshore renminbi business and will significantly increase the volume of renminbi-related transactions in financial centers，” said Zong.

　　“It is unnecessary to appoint too many clearing banks， and a few strategically placed in the world’s major international financial centers will suffice. They must have close ties with global trade and investment， and radiate from these financial centers， establishing a complete offshore renminbi market in foreign countries，” he concluded.

　　By Wang Jun