Yuan Offshore Trade Race Picks Up With Frankfurt Bid: Currencies

The race is on to corner the overseas trade in China’s yuan, with an organization that represents Frankfurt’s financial industry predicting the European Central Bank will get a swap deal valued at four times that obtained last week by the U.K.

The ECB, based in the German finance capital, may obtain a swap agreement with the People’s Bank of China valued as much as 800 billion yuan ($130 billion), according to lobby group Frankfurt Main Finance. A deal would give euro-area central banks access to yuan funds to backstop companies doing business in the world’s second-largest economy, and would dwarf the 200 billion-yuan agreement signed June 24 by the Bank of England.

Policy makers and bankers are meeting with companies from carmaker Volkswagen AG to industrial-gas producer Messer Group GmbH in Frankfurt today to discuss establishing the city as an offshore yuan-trading center. It’s the latest chapter in China’s push for greater use of its currency outside the mainland.

“This has been an issue for our clients for years,” Dirk Schmitz, co-head of the German investment-banking arm of Deutsche Bank AG, the biggest currency trader, said in a phone interview. “German companies have a good commercial relationship with China. Companies often come to us to ask for hedging.”

Yuan Loans

A swap agreement would see the ECB put up euros in exchange for the Chinese currency, which it could then lend to companies.

An ECB official, who asked not to be identified, declined to comment on the talks, saying this was in line with the central bank’s policy.

Germany is China’s biggest trading partner in Europe. By 2015, a third of the Asian country’s cross-border business will be settled in yuan, making the currency the third most-traded after the U.S. dollar and euro, according to HSBC Holdings Plc, Britain’s biggest lender, which has its origins in 19th-century Hong Kong and China.

The three-year swap agreement that BOE Governor Mervyn King signed with his Chinese counterpart Zhou Xiaochuan last month is half the size of Hong Kong’s 400 billion-yuan deal. The accords provide companies with a safety net that aims to give them more confidence in doing business with their Chinese partners.

GEA Benefit

GEA Group AG, the Dusseldorf-based supplier of technology to food and energy companies in countries including China, is among Germany’s small- and medium-sized companies that stand to gain from Frankfurt’s push for a yuan-swap agreement.

“The free convertibility would speed up business and make transactions more secure,” Chief Financial Officer Helmut Schmale said in an interview at the company’s plant in Oelde, Germany, on June 27. “China has always been a growth market for us and will remain such for the foreseeable future. In a few years, the yuan will become the third global currency, with the dollar and euro.”

Sales from GEA’s China business grew to 556 million euros ($720 million) last year, or 10 percent of its total, according to Schmale. Its employees in the country increased 15 percent to 2,431 in December compared with a year earlier, he said.

China’s yuan climbed to a record 6.1210 per dollar on May 27 and closed at 6.1308 in Hong Kong today. The 12-month non-deliverable forwards fell 0.1 percent to 6.302 per dollar at 2:51 p.m. in London.

The yuan is the only major currency apart from Israel’s shekel to strengthen against its U.S. counterpart this year, gaining 1.6 percent.

Overseas Trade

Frankfurt is basing its push for the offshore yuan business on Germany’s close ties with China, the nation’s third-biggest trading partner. The two countries imported and exported goods and services worth 144 billion euros between them last year, according to the Federal Statistics Office in Wiesbaden, Germany.

“The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade, perhaps even using Germany as a hub,” Joachim Nagel, a Bundesbank board member, said in a speech at today’s conference. “Given China’s growing economic importance, the internationalization of the renminbi seems long overdue.”

Transactions in yuan jumped to 8.2 percent of trade deals between Germany and China in May, the biggest month-on-month increase among 20 nations using the Chinese currency, according to the Society for Worldwide Interbank Financial Telecommunication. The Belgium-based group, known as Swift, provides messaging services to banks.

Swap ‘Crucial’

“A swap agreement is absolutely crucial,” Hubertus Vaeth, the managing director of Frankfurt Main Finance, which is backing the German city’s push to be a yuan trading center, said in a June 24 phone interview. “If we had Frankfurt as a trading hub then” business between Germany and China “could double or triple,” he said.

Vaeth said Frankfurt can corner the market for offshore trading in the Chinese currency for the euro region.

“In the euro area, it’s going to be Paris or Frankfurt,” he said. “Germany is China’s leading trade partner, the prime investment destination for Chinese investors in Europe.”

Stephan Bredt of the Hesse state government doesn’t regard Frankfurt, which is located in the region, as being in head-to-head competition with London for the offshore yuan trade, and said that officials are working toward a swap agreement.

London’s Role

“London will play a central role -- we don’t see ourselves in frontal competition,” Bredt, head of the economic sector, financial services and exchanges division at the state of Hesse’s economy ministry, said in a June 21 phone interview. “Politicians get that this is an issue. We’re hearing from companies that this is something they could benefit from.”

The PBOC’s Zhou pledged on June 28 to expand cross-border use of the yuan and encourage multinational companies to include the currency in their asset portfolios. China will allow direct trading between the yuan and foreign currencies and push forward on convertibility without giving up control of capital flows, Zhou said.

Signed Accords

China has signed yuan-swap agreements with jurisdictions including Australia, Turkey, Brazil and South Korea, according to the PBOC. Switzerland is also seeking to be an offshore yuan-trading center, according to the Swiss Bankers Association, while Banque de France Governor Christian Noyer said in October that Paris has “all the conditions to become the renminbi offshore center of the euro zone.” He was referring to another term for the Chinese currency.

Germany and China said they’ll support the sale of yuan-denominated bond sales in Germany after a visit by Chancellor Angela Merkel in August, according to the chancellor’s website.

“We welcome competition from Frankfurt and other financial centers as it will create more business for us all as the renminbi gradually internationalizes,” Mark Boleat, policy chairman at the City of London Corporation, which represents banks in the U.K. capital’s main financial district, said by e-mail yesterday. “London has an increasingly strong position as a global center for renminbi trade services.”

Small Morsels

Overseas companies from Caterpillar Inc. to Renault SA sold $4.4 billion of yuan-denominated notes, known as dim sum bonds, this year. That compares with $2.4 billion over the same period last year and $5.4 billion for the whole of 2012, according to data compiled by Bloomberg.

While yuan transactions are increasing, they still account for less than 1 percent of global trades, compared with about 84 percent combined for the dollar, euro, pound and yen, according to Swift. China’s currency is the 13th most-used, trailing the Thai baht and Norwegian krone, the organization said.

The main obstacle to establishing Frankfurt as a yuan trading center is “to get the liquidity,” Vaeth of Frankfurt Main Finance said. “Right now, the market needs a little bit of help with that.”

Lobbying continues apace. Florian Rentsch, the economy minister for the state of Hesse, where Frankfurt is located, led a delegation of about 60 government officials, bankers and company representatives to China in October.

China Tour

The group visited Beijing, Shanghai and Tianjin to help win orders for German exporters and lobby for Frankfurt as a yuan trading hub. Rentsch signed a cooperation agreement with officials from Beijing’s financial district on the trip.

“London is the world’s biggest foreign-exchange market but Frankfurt is the home of the euro and continental Europe,” Horst Loechel, a professor of economics at the Frankfurt School of Finance & Management who’s also a visiting economics professor at the China Europe International Business School in Shanghai, said in a June 28 phone interview.

“Paris would probably be very interested in becoming a trading hub,” he said. “But they’ve missed the boat, as Frankfurt already has the ECB, as well as a record of stable development during recent crises. Frankfurt will emerge as the winner in the euro area.”