Frankfurt Beats London to Become First RMB Clearing Hub Outside Asia

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SHANGHAI – Germany’s Deutsche Bundesbank and the People’s Bank of China signed a memorandum of understanding (MoU) on Saturday that will establish an RMB settling and clearing service in Frankfurt. Coinciding with Chinese President Xi Jinping’s visit to Berlin, the new MoU will make Frankfurt the first hub for clearing RMB trades outside Asia – narrowly beating London’s Bank of England, which will sign a similar MoU today.

Clearing and settling are essential for international finance and entail converting a promise of payment into the actual movement of money from one bank to another.

While the Frankfurt-based clearing bank has yet to be named, the Industrial & Commercial Bank of China Ltd., Bank of Communications Co., Agricultural Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp. are the top Chinese contenders with existing branches in Frankfurt.

“Frankfurt is one of Europe’s foremost financial centers and home to two central banks, making it a particularly stable location. Renminbi clearing will strengthen the close economic and financial ties between Germany and the People’s Republic of China. The growing trade and investment relations between Germany and China will make the volumes of payment in RMB continue to rise. German Bundesbank supports the development of a yuan-clearing solution in Frankfurt,” said Joachim Nagel, member of Bundesbank’s executive board.

As Germany’s third-largest foreign trading partner, bilateral trade between China and Germany reached 140 billion euros last year (US$192 billion) according to Germany’s Federal Statistics Office. China additionally ranked as the fifth-largest importer of German goods and second-largest exporter to Germany.

Along with the currency clearing MoU, Deutsche Boerse AG, which operates the Frankfurt stock exchange, signed a separate agreement with the People’s Bank of China that will facilitate Chinese issuers and investors’ access to European capital markets and stock listings.

London Follows Suit

The MoU that will be signed today between the U.K. and Chinese central banks follows the signing of  a three-year currency swap arrangement worth RMB200 billion last year and the January issuing of an RMB2.5 billion bond by the Bank of China on the London Stock Exchange’s Professional Securities Market. This was followed by the issuing of an RMB1 billion bond in London by the World Bank’s International Finance Corporation earlier this month.

Currently, London-based asset managers are the only ones in the West permitted to invest directly in Chinese stocks and RMB-based shares through the Renminbi Qualified Financial Institutional Investor program established last year with an initial quota of nearly US$14 billion. Partly because of this, London has become an increasingly popular jurisdiction for Chinese investors seeking to move RMB-based funds to a European destination.

“Connecting Britain to the fastest growing parts of the world is central to our economic plan. Its why I’ve put such government effort over the last three years into making sure we’re the leading western system for trading in the Chinese currency,” said U.K. Chancellor of the Exchequer George Osborne.

RELATED: London Gets Nod as International Center for RMB Trading

While 62 percent of RMB-based payments outside of China already take place in London, the new MoU will firmly establish London’s position as a preeminent non-Asian RMB currency clearing hub.

Previously, London-based entities were required to rely upon Hong Kong’s offshore RMB infrastructure to obtain RMB liquidity and clearing services and, last December, London’s Standard Chartered Bank teamed up with the Agricultural Bank of China to this effect.

Prior to the establishment of this partnership, Standard Chartered Bank had developed an RMB globalization index covering Hong Kong to measure offshore RMB growth – adding Singapore and London in 2011, and Taiwan in 2013.

On the sidelines of the Nuclear Security Summit in the Netherlands last week, British Prime Minister David Cameron and Chinese president Xi Jinping reportedly discussed the final details of the MoU and paved the way for the official announcement of the arrangement last Wednesday.

While this announcement preceded the signing of Frankfurt’s currency clearing MoU, the actual MoU will not be signed until Monday.

Although British officials officially stated their intent to seek approval for the establishment of a clearing and settling bank in London last year, it took several months for the finer details of the agreement to be finalized.

It may be some time before the banks in both cities handling the clearing is known, however. After a similar agreement was signed with Singapore last year, it took nearly six weeks for the clearing bank to be announced. This is partly due to the political sensitivity of offshore RMB clearing with the Chinese government.

While both London and Frankfurt have faced fierce competition in recent years from Paris and Luxembourg to become the top European destinations for RMB trading, their new MoUs with the People’s Bank of China will enable the cities to attract significantly higher volumes of RMB-based transactions and cement their status as European locations of choice for settling financial transactions outside the Asian time zone.

Beijing is also negotiating with a number of other countries and cities concerning the establishment of international RMB trading hubs. These include Kuala Lumpur, Sydney, and Dubai in Asia, Nairobi in Africa, Luxembourg and Zurich in Europe, and Toronto and San Francisco in North America.

RELATED: Chris Devonshire-Ellis on the BBC World Service discussing the development of China’s RMB hubs (starts at 17:00)

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