The experimentation in renminbi (RMB) internationalization is about to take a new turn.  On July 6, 2012, China and Singapore signed an enhanced free trade agreement (China-Singapore Free Trade Agreement) that includes a promise to designate a Chinese bank to clear RMB deals in Singapore.

Beijing’s decision to name another RMB-clearing bank in the near future in Singapore — in addition to the one that already exists in Hong Kong — has grabbed the attention of market watchers. The decision suggests that China’s regulatory authorities are ready, once again, to raise the quotas on offshore RMB transactions. 

Singapore’s banking community is poised to respond. A Bank of Singapore currency strategist suggested to The Business Times (Singapore) that, “The establishment of a renminbi-clearing bank in Singapore should strengthen the country’s position as an offshore RMB trading centre, outside of Hong Kong.”[1] 

Singapore already has the largest share of RMB payments globally, outside of China and Hong Kong.  Singapore’s offshore RMB flows have been buoyed by the healthy growth of trade and financial linkages between the countries. In 2011, China was Singapore’s third-largest trading partner with trade totalling $101.4 billion, representing 10.4 percent share of the total, and an increase of 6.4 percent from 2010.[2]

Under the enhanced free trade agreement, two Chinese banks currently operating in Singapore will be granted Qualified Full Bank privileges by the Monetary Authority of Singapore, and Chinese authorities will name one of the banks as the clearing bank for RMB in Singapore.

According to Singapore’s Ministry of Trade and Industry, China’s Banking Regulatory Commission has agreed to also process expeditiously all applications made by selected Singapore banks for the establishment of branches and sub-branches in China, subject to Chinese prudential law, regulations and rules.

The Agreement means increasing financial integration between China and Singapore, and within the Asian region, as the enhanced access will make it easier for Singapore’s leading banks — Development Bank of Singapore, Overseas Chinese Banking Corporation (OCBC) and United Overseas Bank — to expand in the large Chinese market, and will also make it easier for China’s two leading state banks to expand their footprint in Singapore, which also happens to be a regional and global financial hub.

Deciding which of the two Chinese banks will receive the status of clearing bank has yet to be finalized. According to the authorities involved on both sides, it would be inappropriate to prejudge the application and assessment process. More fundamentally, gaining the status of clearing bank means major perks for the winner. If it is the Bank of China (BOC) in Singapore, it would mean that Beijing has decided to keep the clearing function inside the same house as in Hong Kong. In this scenario, China’s regulatory authorities would see the gains in maintaining a single clearing window as outweighing the costs in terms of tracking RMB flows, and managing the money supply of the offshore RMB pool.

But there are costs. Beijing is aware that the other banks in Hong Kong authorized to conduct RMB business have voiced concerns, even discontent, about the commercial privileges that are granted to the BOC in Hong Kong, and it may be time to end the clearing monopoly of the BOC. Also, by differentiating the clearing bank for Singapore, it would give Singapore a feature to differentiate itself as a major offshore RMB hub and market.

Over the past year, there have been reports in the Singaporean financial press that China’s — and the world’s — largest bank by capital assets, Industrial and Commercial Bank of China (ICBC), would be granted the RMB-clearing bank status in Singapore. Such a decision would represent a breakthrough of sorts for the evolving international regime for RMB internationalization — even if choosing ICBC still means keeping the clearing function “inside the China house.”

BOC, which started operations in Singapore in 1936, has five sub-branches and one remittance centre in the Lion City. ICBC established its first operations in Singapore in 1993.

To date, Singapore banks have had to clear RMB transactions via Hong Kong or Chinese mainland banks.

Singapore’s banks believe that the establishment of an RMB-clearing bank in the city will boost their RMB business. OCBC’s head of global trade finance said that, “this is surely a positive step to increase the already brisk trading activities in RMB here. With the appointment of an offshore RMB-clearing bank in Singapore, we can expect a later cut-off time for the settlement of exposures compared to what is currently being stipulated by the banks in Hong Kong.”[3]

Singaporean banking representatives also suggest that having a clearing bank in Singapore will help attract a greater pool of liquidity as more flows are directed here; Singaporean companies will benefit from cheaper RMB trade loans; which, in turn, would attract more companies, both trading and procurement, to set up in the city.

Monetary Authority of Singapore estimates indicate that the pool of RMB deposits in the city total RMB60 billion (US$12 billion), about one-tenth of RMB deposits in Hong Kong. The limited amount of RMB in the city, to date, can be seen as the market lacking liquidity, and a constraint on becoming a major offshore RMB hub, or, instead, that there is a lot of room for growth.

Closer study of the source of RMB in Hong Kong, for example, indicates that there is enormous potential for Singapore in facilitating RMB-denominated securities trading for ASEAN economies and global traders and financial investors, as a key part of its evolution as an offshore RMB hub. 

More to come in the next commentary on the plans of the Singapore stock exchange (SGX) to list, quote, trade, clear and settle securities denominated in RMB.

Gaining the status of clearing bank means major perks for the winner.
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  • Gregory Chin

    Gregory Chin has experience as a practitioner in policy planning and implementation of foreign policy, and academic training on the study of China, Asia and global affairs. His research focuses on the political economy of China, Asia and global governance. A faculty member at York University (Canada), he joined CIGI in 2007 as a senior fellow, and in 2011 was acting director of the Global Development Program and chair of the China Research Group.

The disjuncture between global markets and an international monetary system based on national currencies generates instability for global trade and finance. As the BRICS (Brazil, Russia, India, China, South Africa) and Asian countries have become more integrated into the world economy, they have become increasingly aware of fundamental problems or challenges of the current International Monetary System (IMS).