One of the bigger stories of the last several years has been the emergence of the Chinese currency as a currency used to settle global business deals. As the Chinese economy grows, the old default global currency, the U.S. dollar, is increasingly challenged by the Chinese yuan (or renminbi) as a global trade settlement currency.
Around the world financial institutions are building out RMB trade settlement capabilities as the internationalization of the monetary unit goes ahead. Today, the renminbi is currently the second-most used currency in global trade finance. But use is growing faster than any other currency in the world. In 2013 18% of China's total global trade was settled in the yuan, up from just 2% in 2010. This is expected to 30% by the end of next year.
This is a remarkably fast shift in the basic architecture of the global economy. As the yuan is more commonly used, it’s value will rise, Chinese consumers will increasingly be able to buy global goods. Global trade patterns will shift. The average Chinese person will consume at a level closer to the global average.
But as this one-time shift in the global financial architecture plays out, financial elites have been tripping over themselves to get in line and be granted official status for RMB settlement by the Chinese government. To be certified as a trade settlement center certain licenses have to be granted by the government, swap lines set up between central banks. This process is going ahead rapidly. Hong Kong was named the first RMB settlement centre in 2009. Since then several Asian, central Asian and European cities including Singapore, London, Frankfurt and Luxembourg have received designation.
So far, no region in the Americas has been granted status. In a bid to be the first the Toronto Financial Services Alliance and AdvantageBC announced yesterday they are working together to get Canada status. "When we looked at Canada's advantage we realized there is a lot of trade between China and Canada. Lots of that trade goes through BC. But the trade infrastructure is in Toronto. It made sense to the two of us to team up, " said Janet Eckler, president of the TFSA in an interview with WP.
The two provinces seem to be in the front of the pack. So far the only other North American region that seems to be making a bid is San Francisco. But Ontario and BC have already done some work toward this end. In 2013 BC issued a government bond denominated in RMB to become the first "dim sum" bond in Canada. The bond was quickly oversubscribed, largely by Asian investors according to the TFSA presser. There is also a working group set up by the TFSA that includes thirteen national financial companies to drive this initiative. "We're not the only lined up at China's door. But China is hoping to have the RMB used as an international currency. If Toronto is to be a global trading center we need to be a part of this rising global currency,” says Ecker.
Trade between Canada and China has increased to $73 billion in 2013, up 60% from 2009. Almost 1.5 million Canadians identify themselves as of Chinese ethnic origin. "The establishment of an offshore RMB center and the accompanying process will be one of the milestones in Canadian financial markets over the upcoming years," said Lijun Wang, President and Chief Executive Officer of Bank of China (Canada), a member of the working group.
The TFSA is betting on a couple of advantages: the professionalism, scope and depth of the foreign exchange, capital and derivative markets; time zones connecting Asia-Pacific, Europe and America; robust legal environment; massive institutional investor base; and booming trade between China and Canada. “All contribute to a brighter prospect of building a North American offshore RMB center in Canada,” according to the press release. Ecker hopes something could be done by the end of this year. The PM will travel to China later this year for an APEC conference.