Canada and China agree to establish North American Renminbi hub

Renminbi hub | BCBusiness
Federal cabinet members met with their Chinese counterparts over the weekend.

Hub will lower transaction costs for Canadian companies with business in China

Prime Minister Stephen Harper signed an agreement Saturday to establish an offshore centre that will allow for the clearance and settlement of transactions in the Chinese currency in Canada, the first such hub in the Americas. As part of the agreement, Chinese regulators will allow Canadian banks, HSBC Canada and Bank of Montreal, to settle transactions  an initial quote at 50 billion renminbi (RMB), or around $8 billion. 

While the impact of a Renminbi hub—a piece of virtual financial architecture that could ease the flow of trade and investment between Canada and China—would be small, it could bolster the trade that B.C. companies do with their Chinese counterparts by up to $120 million per year, according to Bruce Flexman, former head of trade lobby group AdvantageBC. And as a symbol of the growing economic ties between the two regions, it’s a significant leap forward, especially as Chinese investors eye B.C.’s various natural resource projects.

The Chinese government had been scouting for a location for a designated trading centre in North America, trying to find something in a western time zone that would allow the Renminbi to be tradable around the clock. On November 8, Prime Minister Stephen Harper met with Chinese president Xi Jinping in Beijing to discuss a host of issues, including the architecture that would allow for the easier movement of money across the Pacific. According to a report from the Vancouver Economic Commission, the Chinese government and Chinese banks had been “comparatively more eager” than Canadian officials to establish the hub here.

China is the largest trading economy in the world, and it’s keen to use its currency in trade deals abroad. In 2009, the Chinese government began to strip away restrictions on the use of its currency as part of a suite of financial reforms that included interest-rate liberalization and the opening of China’s capital markets. At that time, China settled just two per cent of its external trade transactions in its own currency. By 2014—as Beijing and its foreign counterparts licensed trading exchanges and currency swap lines in financial hubs such as London, Frankfurt and Singapore—that figure had grown to 17 per cent, or around $358 billion annually. In that same period, trade between Canada and China increased 60 per cent. A clearing-bank mechanism could shave currency conversion costs for Canadian companies who import from and export to China.

While $120 million in savings—compared to the $70 billion in annual Canada-China trade—is small potatoes, the move could make Canadian bids and projects more attractive to Chinese investors, who are keen to avoid the risks and hedging required when a deal is processed in U.S. dollars. That extra step can add one to five per cent to the cost of a trade deal, according to figures from HSBC Bank Canada. Yet relatively few Canadian companies do it: in a survey of its customers in July, the Vancouver-based bank found that only five per cent of Canadian companies conducting business in China have settled deals in Renminbi compared to the global average of 22 per cent.

So why Vancouver as the new home of a trading hub? This city is ranked 17th on the Global Financial Cities Index, has a comparatively small population base and a dearth of corporate headquarters. It isn’t an obvious choice for the first Renminbi trade settlement in the Americas. But what it does have going for it is tax incentives for financial-sector businesses, pioneer issuance of the Chinese currency bonds and strong cultural and trade ties with Mainland China—bolstered by institutions such as UBC with powerful alumni in China’s banking sector. That’s why Christy Clark and the provincial government got behind the idea in June. “We have tremendous ambitions and we know that the Bank of China will be part of it,” Clark told a group of investors and bankers at the China and Canada Economy and Finance Forum, held in Vancouver in June.

Kenny Zhang, a senior researcher at the Asia Pacific Foundation of Canada, also credits B.C.’s November 2013 issuance of Renminbi-denominated bonds—also known as the “dim sum bond”—for piquing interest in Vancouver. The province was the first subnational jurisdiction to issue bonds in Chinese currency (government bonds are typically issued in Canadian dollars or U.S. dollars)—a move that showed the Chinese that B.C. was serious about doing business in Renminbi.

As part of the agreement, the Chinese central bank appointed the Toronto-based subsidiary of the the Industrial Commercial Bank of China to clear renminbi transactions in Canada. In the background, the Bank of Canada and the People’s Bank of China  have agreed to set up a currency swap line, for a maximum amount of 200 billion RMB, with a reciprocal amount of $30 billion Canadian, which will allow Canada’s central bank to provide emergency liquidity in certain market conditions.