By Vivian Ni
Apr. 21 – Singapore, the major commodities trading partner with China and regional treasury center for multinationals, is following Hong Kong to become the second overseas RMB trade hub. However, experts believe that in the foreseeable future, Singapore will unlikely replace Hong Kong’s position as the primary RMB trade center.
As Singapore’s RMB ambitions grow and China looks to expand RMB’s international influence, the two governments are taking further steps to promote RMB settlement in Singapore. The Monetary Authority of Singapore (MAS) said on April 19 that China was planning to appoint a major Chinese bank soon to clear RMB trades in the city-state. Without clarifying what kind of services the appointed clearing bank will provide, MAS Chairperson Goh Chok Tong told media that a Singapore branch of either the Industrial and Commercial Bank of China or Bank of China is supposed to be selected to handle the clearing. The clearing bank will give Singaporean banks direct access to RMB, so that the country will become less reliant on Hong Kong or Chinese commercial banks when routing RMB transactions.
Although Hong Kong – being part of China – is obviously the most ideal location for the country to experiment in its RMB liberalization, China is now making attempts to take its local currency trading outside the country and Singapore is one of the best choices. Importing a large amount of commodities from Singapore, China is more than happy to see more of these trades settled in RMB. Ray Ferguson, Standard Chartered’s regional CEO for Singapore and Southeast Asia, even pointed out that “Commodities are the reason why the RMB scheme is going global.”
The MAS also said that Singapore is well-prepared to facilitate trade-linked business flows with Mainland China. As Asia’s largest foreign exchange trading center after Japan, Singapore houses many multi-national corporations’ treasury centers as well as offshore trading operations, and has all the necessary financial infrastructure needed to conduct and boost RMB trading. A statement of the Singapore Central Bank mentioned “several banks in Singapore have begun offering RMB banking services to their clients and expanded their product offerings to retail investors.”
The Chinese government has been highly supportive of Singapore as well. In July last year, the two countries signed a US$23.9 billion-currency swap agreement to ensure the yuan liquidity in the city-tate. Chinese banks have also been expanding their operations in Singapore.
Analysts believe Singapore possesses huge potential to become another RMB trading hub, not only because the pie of the offshore yuan business has grown so big – around 7 percent of China’s international trade was settled in RMB during the first quarter of this year, but also because the Chinese government will not want to leave Singapore out as a center to facilitate its trading ties with the whole Southeast Asia. However, in the mean time, they pointed out that Hong Kong will remain as the paramount RMB trading center, due to both political and economic reasons.
From the political side, the Chinese government still wants to take the yuan liberalization slowly and keep it under control. A rapid yuan appreciation will likely harm numerous Chinese businesses that have long-term sales contracts denominated in U.S. dollars.
From the economic side, Hong Kong has taken an early bird advantage, since it is so far the only jurisdiction outside Mainland China with an RMB clearing banking presence. Thanks to that, Hong Kong banks took the major share of RMB deposit flows from Mainland China through trade channels. Hong Kong’s February RMB deposits increased to US$62 billion, eight times more than the amount two years ago. The large RMB deposits have also fueled the RMB-denominated financial products market, including a series of RMB-based bonds issued by the Chinese government and various domestic firms.
Singapore’s Goh has also played down the prospect of competition between Hong Kong and Singapore as RMB trading centers, emphasizing it is natural that Hong Kong becomes the main player that conducts RMB-based financial activity and Singapore has “no ambitions to try to rival Hong Kong.”