Europe climbs ladder in offshore yuan trading

Europe is poised to become the second-biggest offshore yuan market after Hong Kong, following the recent designation of clearing banks for the Chinese currency in London and Frankfurt.

Swift, the Brussels-based Society for Worldwide Interbank Financial Telecommunication, said in its latest report on use of the yuan that Europe accounts for about 10 percent of global payments in the currency.

In the past year alone, four European countries have emerged in the top 10 yuan hubs, excluding China’s mainland and Hong Kong.

Since July 2013, European payments directly exchanged in yuan with the mainland and Hong Kong have increased 105 percent, showing a considerable positive trend in use of the currency.

The top four European yuan centers are the United Kingdom, France, Germany and Luxembourg. Payments in yuan grew 124 percent in value in the UK in the year to July, according to SWIFT.

Mark Boleat, policy chairman at the City of London Corporation, said SWIFT data are cheering news for the yuan business in the UK financial sector.

“We are delighted to see these encouraging figures, which demonstrate the adoption of the yuan worldwide and the steady growth of offshore yuan business in Europe,” Boleat said. “The UK figures highlight continued interest from corporates in using the UK’s diverse range of yuan products and services.”

He added, “London is the leading international financial center and the world’s largest center for foreign exchange. We work hard to support development and efficiency in financial and professional services. The current yuan market figures are impressive, but more remains to be done, such as enhancing liquidity of the offshore yuan market and developing further products and services.”

In June, the People’s Bank of China approved yuan-clearing banks for the UK and Germany. The country’s second-largest lender, China Construction Bank, was designated for London, while Bank of China, the nation’s biggest foreign-exchange institution, was named for Frankfurt.

Germany ranked second among the top four European yuan markets, with 116 percent growth in yuan payments in the year ended July 2014.

Deutsche Bank said in a report that the development of the offshore yuan market in Europe will follow a market-driven model, and Europe is likely to become the second-largest offshore yuan market in the world.

Hong Kong will remain the largest offshore yuan market due to its yuan payment system and its network of participating banks, it said.

Evan Goldstein, global head of yuan services at Deutsche Bank, said the findings by SWIFT look be a tipping point in adoption of the yuan in Europe as EU-China trade continues to grow.

The bank forecasts yuan settlement in EU-China bilateral trade will triple to 56 percent of China’s global trade in the next three years.

It also said it expects the offshore yuan deposit base to expand to 2.5 trillion yuan (US$397 billion) by the end of the year, given the yuan liquidity boost in Europe.

Goldstein also said the offshore yuan markets in London and in Frankfurt will focus on different products and services, driven by the fundamental demands in each market.

“The City of London is well known as a financial market center,” he said. “That’s why the yuan is successful there. Frankfurt is where the European Central Bank is located, and it is the real economic and trade finance gateway for China into Europe.”

Based on different characteristics, London will primarily focus on institutional investment demand, with significant potential to expand offshore yuan products. Meanwhile, the Frankfurt market will focus on corporate demand for yuan services and yuan-financing solutions, according to the German bank.

EU-China bilateral capital market access will continue to broaden, with more European investors investing in the onshore yuan capital market via the Renminbi Qualified Foreign Institutional Investor and interbank bond market programs, and more Chinese investors gaining access to the London and Frankfurt capital markets.

For most European yuan hubs, China remained the main trading partner. However, Luxembourg has shown a noticeable increase in offshore flows, according to Michael Moon, head of payments and yuan at SWIFT for Asia Pacific.

He said a bigger contribution from those offshore flows is expected as the yuan continues to become more international.

“After the UK and Germany, we may see similar trends in France, Luxembourg and even Switzerland. A new bilateral currency swap agreement between the People’s Bank of China and the Swiss National Bank has put Switzerland in line to become a new yuan hub in Europe,” Moon said.

According to SWIFT’s report, the yuan strengthened its position as the seventh most used global payments currency, accounting for 1.57 percent of global payments.

In July, yuan payments grew 3 percent from a month earlier. Globally, transactions in all currencies increased 2 percent.