CNH Tracker-European yuan business poised to take off with China's blessing

HONG KONG, June 26 Thu Jun 26, 2014 12:23am EDT

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HONG KONG, June 26 (Reuters) - The overseas expansion of China's yuan currency is taking giant strides toward Western Europe, with two clearing banks assigned for the region in the past week - the first time yuan clearing banks have been operated outside of Asia.

The move is set to breathe new life into Europe's yuan trade, which is expected to see faster accumulation of yuan deposits and a boom in financial products linked to the currency.

It took almost 10 years for China to set up another yuan clearing bank after Hong Kong, yet clearing banks began to spring up in the past year as Beijing stepped up efforts to facilitate yuan usage in trade settlement and investment among global investors, with London and Frankfurt as the first West European locations.

China's central bank said last Thursday it had designated Bank of China to offer a yuan clearing service in Frankfurt, following an announcement a day earlier that China Construction Bank was selected to provide the same service for London.

A yuan clearing bank enables overseas banks to access China's onshore money market directly without relying on Hong Kong's infrastructure, improving efficiency and convenience when settling yuan transactions.

"The broadening of RMB (Renminbi/yuan) community into the Western hemisphere will enlarge the global transaction and payment volume of the Chinese currency," ANZ analysts wrote in a note to clients.

Adding to the momentum is the direct trading between the yuan and the sterling which started last week, given that sterling is a very actively-traded currency and London already takes more than 20 percent of yuan FX trading.

Frankfurt's strength lies in its close trade relationship and big trade surplus with China, which puts it in a good position to challenge Luxembourg's yuan pool - currently the largest in Europe.

Germany is China's most important trading partner in Europe. Total import and exports between the two countries reached $161.6 billion in 2013 and Germany's trade surplus amounted to $26.8 billion, according to the General Administration of Customs of China.

Cross-border trade settlement is the main channel for yuan accumulation in overseas markets especially if an offshore centre has large trade surplus with China. The surge of yuan deposits in Taiwan is an example.

As China hastens its steps to establish the "redback" into foreign corporates and investors, it is reasonable to expect more such clearing banks being appointed in the near future and ideally in the American time zone.

Chinese media reported that the Canadian government is studying how to set up a yuan clearing centre with the private sector, and hopes to see some progress later this year.

Beyond these yuan clearing banks, Beijing also aims to roll out a more aggressive global solution in 2014, called China International Payment System (CIPS). The system will enable banks in any country to access the clearing platform of the People's Bank of China directly.

However, the timetable for this facility has become progressively less clear, possibly because the complexities of designing such a system in an environment of currency controls, the City of London - the capital's financial centre - said in its latest report.

WEEK IN REVIEW:

* China Construction Bank (Asia) sold the first offshore yuan bond in Switzerland. The 1.25 billion yuan ($201.32 million) three-year dim sum bond was rated A2 by Moody's and was priced at 3.45 percent.

* Eastern Creation II Investment Holdings completed its sale of a 1.2 billion yuan three-year dim sum bond with a coupon of 3.75 percent, according to a term sheet seen by Reuters. The senior guaranteed bond attracted 2.2 billion yuan from 56 accounts.

* China's central bank said it would expand a pilot programme from Shanghai's Free Trade Zone to all of Shanghai from Friday. Under the plan, China will first liberalize interest rates on small-sum foreign exchange deposits from companies, and then expand to the scheme to individuals.

* Investor sentiment on most emerging Asian currencies improved over the last two weeks, with the first bullish bets seen on China's yuan in four months as the currency showed signs of stabilising, a Reuters poll showed.

CHART OF THE WEEK:

China's yuan expands its footprint quickly beyond Hong Kong, the first offshore yuan center: link.reuters.com/xak32w

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($1 = 6.2090 Chinese Yuan Renminbi) (Editing by Eric Meijer)

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