London and Singapore Will Be Top Offshore RMB Hubs Outside of Hong Kong, Says BNY Mellon

By 2020, London and Singapore will emerge as the two dominant offshore renminbi (RMB) hubs alongside Hong Kong, according to Fred DiCocco, Asia-Pacific head of sales & relationship management for BNY Mellon’s Treasury Services.

The RMB has quickly been growing as a global currency as China has loosened its restrictions. According to SWIFT data on the share of the world’s inbound and outbound payments based on value, the currency has risen from 13th in January 2013 to 7th in August 2014. DiCocco says that 20% of China’s $4 trillion in annual trade is conducted in RMB, which could rise to as much as 50% by 2017, becoming one of the top global trade currencies.

As the RMB grows, offshore centers are likely to hold an even higher market share. From July 2013 to July 2014, according to SWIFT, the value of RMB payments in the U.K. hub rose 123.6%, the fastest growth in Europe.

“Hong Kong is still the undisputed number one offshore RMB payments centre with a 71% market share, but its leadership position is slowly eroding having dropped by around 10% over the last three years with London and Singapore both establishing themselves as strong alternatives,” says DiCocco. “Whilst their market shares are minor when compared with Hong Kong today, languishing in single digits, I expect we will see both centers surge forward and break away from the rest of the pack over the next few years.

“With China-EU trade representing the second largest global economic co-operation pact, and with more than 40% of all global foreign exchange trading taking place in London, it was no surprise two years ago to see London take the initiative to position itself as the main offshore trading centre for RMB. It quickly rose to a commanding position and assumed the second largest center in respect of market share.”

While the two markets do compete for overall market share, they have somewhat different targets, and as DiCocco points out, the U.K. and Singapore agreed to a “UK-Singapore Financial Dialogue” in February to foster financial and economic cooperation between the two markets.

“Outside of China and Hong Kong, London and Singapore are the leading centers for RMB trading and financing, and serve different investor bases and business communities.The two centers can cooperate to promote fungibility of the RMB globally, encourage innovation in RMB products and services and meet the growing appetite for RMB investment instruments,” Tharman Shanmugaratnam, minister for Finance and chairman of the Monetary Authority of Singapore, said at the time of the agreement.”

As of June 2014, SWIFT’s RMB payments value data shows Singapore overtook the U.K to hold 28.4% of the market share, the highest excluding China and Hong Kong, while the U.K. holds the second most at 22.5%. DiCocco explains that Singapore acts as the main trade finance hub for Asia-Pacific, which benefits Singapore for RMB activity since offshore RMB growth has primarily been driven by trade finance settlement.

Plus, “Singapore had a small head start over London in already having an infrastructure to process and provide easier access to RMB locally in the form of a nominated clearing bank—China’s state-owned ICBC. Whilst London and Beijing have also signed an agreement to set up an RMB clearing bank in London, no institution has yet been named,” says DiCocco.

Other markets have also been growing their RMB activity, but Singapore and London remain in the lead, and DiCocco thinks this trend will continue, even if China does not have a preference in which markets become the largest hubs.

“Whilst this competition from rival centers is acutely important to those involved, from China’s perspective Beijing is less concerned about the competition for market share between offshore RMB centers than with expanding the number of locations to further promote and accelerate the internationalization of the currency,” he says. “You see this in some of the recent announcements from Beijing where plans are in place to designate clearing banks in Paris and Luxembourg to complement London, Frankfurt, Singapore and Sydney as official offshore RMB cities. Only time will tell who the winners will be, but I believe by 2020 we will see a three-horse race between London, Singapore and Hong Kong for supremacy, with Hong Kong probably continuing to lead the way.”