A. The Functioning of an Offshore Renminbi Hub

According to SWIFT, offshore RMB hubs enable RMB-denominated transactions to be cleared and settled outside of China, thereby avoiding the delays associated with clearing and settling transactions within China and with the PBoC. Immediate clearing and settling allows the parties to a transaction to pay and receive funds instantaneously, which increases the RMB’s liquidity.

Clearing of the RMB with an offshore RMB hub involves either an agent bank of a mainland China bank or a local clearing bank. The first offshore RMB clearing bank was established in 2003, when the PBoC and the Hong Kong Monetary Authority appointed the Bank of China Hong Kong as a clearing bank for offshore RMB.

If an offshore clearing bank has a settlement account with the PBoC and is a member of the China National Advanced Payment System (CNAPS), settlement can occur at that bank. For example, the Bank of China Hong Kong has a settlement account with the PBoC and is a member of CNAPS. Other banks in Hong Kong can join the RMB settlement system by having a settlement account with the Bank of China Hong Kong.

In addition to RMB clearing and settlement, an offshore RMB hub may also provide such financial services as foreign exchange, RMB deposit accounts and the granting of RMB-denominated loans. It may also facilitate the issuance of RMB-denominated corporate and sovereign bonds, as well as other financial instruments, including derivatives.

B. Canada’s Renminbi Hub: Background

On 8 November 2014, the governments of Canada and China signed an agreement establishing Canada as the first North American RMB hub. To support the use of the RMB in trade, commerce and investment between Canada and China, the agreement comprises the following three measures:

• a three-year reciprocal currency swap line between the Bank of Canada and the PBoC;
• a memorandum of understanding (MOU) between the Bank of Canada and the PBoC to designate an RMB clearing bank in Canada and Canada as an offshore RMB clearing centre; and
• the granting of an initial RMB Qualified Foreign Institutional Investor (RQFII) quota in the amount of RMB50 billion to Canadian financial institutions.

The three-year reciprocal currency swap line to which the Canadian and Chinese governments agreed is for maximum amounts of RMB200 billion and C$30 billion. It will support the establishment of an RMB clearing bank in Canada and will enable the Bank of Canada to provide emergency liquidity, in RMB, to Canadian institutions in the event that such liquidity is warranted by market conditions; these conditions might include illiquidity resulting from a financial crisis. At present, the PBoC has bilateral currency swap line agreements with 29 central banks.

Secondly, the purpose of the MOU is two-fold: to establish a regular dialogue on the conduct of RMB-denominated business and on the availability of RMB-denominated assets in Canada; and to support the establishment of an RMB clearing bank in Canada. On 9 November 2014, the PBoC designated the Industrial and Commercial Bank of China (Canada), which is located in Toronto, as the RMB clearing bank for Canada’s RMB hub.

Finally, the RQFII quota allows registered investors outside of mainland China to access financial instruments in China’s capital markets through a licensed financial institution. Canadian financial institutions will be able to apply for a share of Canada’s quota, thereby providing Canadian and foreign investors with access to RMB-denominated instruments – such as Chinese bonds, equities, exchange-traded funds, warrants and mutual funds – that might otherwise be unavailable to them.

C. Canada’s Renminbi Hub: Witnesses’ Views

In discussing Canada’s RMB hub, the Committee’s witnesses focused on the following issues: the hub’s infrastructure and hours of operation; the responsibilities of the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI); RMB-denominated investments; and challenges in relation to the hub.

1. Infrastructure and Hours of Operation

BMO Capital Markets and the Royal Bank of Canada informed the Committee that, with the Canadian RMB hub, a business located in Canada will be able to use its local financial institution to conduct a RMB-denominated transaction, provided that the institution is a member of the hub. The Royal Bank of Canada also indicated that the hub will operate electronically through existing infrastructure, such as communication networks, and will not require a large investment of capital, labour or other resources.

The brief submitted to the Committee by British Columbia’s Ministry of Finance described Canada’s RMB hub as a computerized trading platform managed by private sector financial institutions. In speaking to the Committee, it said that an RMB hub is not a “place,” but a way of doing business, trade, banking and investing that are denominated in the RMB; the location of the clearing bank in Toronto does not define the hub. It also stated that the Canadian RMB hub must be an initiative that engages Canadian businesses across the country.

The Industrial and Commercial Bank of China commented on the hours of operation of the Canadian RMB hub for clearing and settling RMB, which will occur around the clock and every day of the week, highlighting that – as it will be able to provide services when Asian financial institutions and markets are closed – the hub will have an advantage over Asia hubs. AdvantageBC noted that, with Canada having a number of time zones, buying and selling the RMB will be continuous throughout the world.

In commenting on the benefit of the Canadian RMB hub for Chinese businesses, Finance Montréal said that the hub will give such businesses simultaneous access to buyers and sellers of RMB-denominated financial instruments in both the North and South American financial markets, as they are in the same time zones.

2. The Bank of Canada and the Office of the Superintendent of Financial Institutions

In speaking to the Committee about the reciprocal currency swap line as a form of insurance for a financial institution that is a member of the Canadian RMB hub, the Bank of Canada noted that swap lines between it and other central banks have never been used. It also indicated that, if the Bank uses the reciprocal currency swap line it has with the PBoC, it will request collateral from the member of the hub before providing the member with RMB.

Moreover, the Bank of Canada said that it will monitor the level of RMB clearing and RMB liquidity in Canada, and will maintain regular dialogue with the PBoC. According to it, OSFI will collect information on the use of the RMB in Canada.

Regarding prudential regulation, the Industrial and Commercial Bank of China noted that it is awaiting final approval from OSFI before offering RMB clearing services; it expected to launch such services on 23 March 2015, and has started to do so.

3. Renminbi-denominated Investments

Export Development Canada told the Committee that it issued RMB-denominated bonds in July 2013 and in November 2014; the former had a face value of 101 million RMB and was offered at 2.1% for 12 months, while the latter had a face value of 306 million RMB and was offered at 2.5% for 18 months. It characterized these issuances as symbolic, in that they were not needed to fund Export Development Canada but were requested by investors.

In speaking about the Government of British Columbia’s RMB-denominated government bond, British Columbia’s Ministry of Finance noted that it did not try to obtain the RMB on the open market to pay bondholders; instead, it borrowed in that currency and invested in RMB assets. It said that, when the Canadian RMB hub opens, it hopes to sell such bonds to Canadians; in that case, RMB deposits in Canada will increase and the liabilities will remain in Canada.

BMO Capital Markets commented on the types of investments that registered investors can make under the RQFII quota, and said that Canadian pension plans would probably purchase short-term Chinese government debt. Regarding the purchase of RMB‑denominated financial instruments by Chinese investors, Finance Montréal noted that such instruments could be purchased by Chinese pension funds that have portfolios that are managed by entities in Montreal.

4. Challenges Faced by Canada’s RMB Hub

The Industrial and Commercial Bank of China told the Committee that, in order to generate the RMB trading volumes that will be needed to remain viable, the Canadian RMB hub needs to attract business from throughout North America; as well, it must create tailor-made RMB services that can compete with those provided by other RMB hubs around the world. The Canadian Chamber of Commerce indicated that Canadian banks could increase the number of RMB transactions by doing more business with U.S. firms. British Columbia’s Ministry of Finance noted that it is working with the Government of Ontario, the federal government and others to educate businesses about the Canadian RMB hub; the objective is to increase the volume of RMB transactions.

In speaking about the relevance of RMB clearing and settlement at an offshore RMB hub after the Chinese government ends its restrictions on cross-border transfers of the RMB, AdvantageBC said that the RMB may be cleared and settled at any financial institution that has an account at the PBoC. It also noted that Canada has a limited timeframe within which to take advantage of being the only country in the Americas – at present – that has an RMB hub.

The Department of Finance commented on the purchase and sale of the RMB in Canada, highlighting that – when compared to the currency markets for the euro or the yen – the currency market for the RMB is less sophisticated, as it has fewer foreign exchange forwards, currency swaps and options.

D. Renminbi Hubs in Other Countries: Witnesses’ Views

The City of London Corporation spoke to the Committee about the RMB hub in the United Kingdom, noting that the Bank of England and the PBoC have a reciprocal currency swap line, and that the China Construction Bank – which is located in London – is the RMB clearing bank. It highlighted that, to assist in the development of the currency market for the RMB in the United Kingdom, it is involved in education and marketing to raise awareness about use of the RMB. As well, it noted the success of the United Kingdom’s RMB hub, mentioning that the hub includes domestic and international financial institutions.

The China Construction Bank commented that there are 11 offshore RMB clearing banks located in various RMB hubs throughout the world, including in Toronto. It also highlighted the growth in the number of RMB-denominated payments that were cleared at various hubs between the second quarter of 2012 and the second quarter of 2013; for example, payments cleared at the Australia hub grew by 676% over that period.