Frankfurt Open for Yuan Clearing as Liquidity Rises

Frankfurt, which is seeking to corner a share of the burgeoning offshore yuan market, has set the ball rolling with the first clearing of transactions in the Chinese currency.

Bank of China Ltd., chosen by the People’s Bank of China in June to clear payments in the euro-area’s financial capital, has spent the last five months building the infrastructure to facilitate settlements before the official start of clearing today. Deutsche Bank AG, Commerzbank AG, DZ Bank AG and Landesbank Hessen-Thueringen Girozentrale have cleared transactions through the Frankfurt hub, according to Bernd Meist, its managing director.

Frankfurt became the first financial center in Europe to win the right to clear and settle payments in yuan when the Bundesbank and the People’s Bank of China signed a memorandum of understanding on March 28. The clearing bank makes it easier for German lenders and their clients to access the yuan and cut costs by making euros directly convertible with the Chinese currency without having to be changed into U.S. dollars first.

The yuan is “gaining traction as a trade currency and has in my opinion already reached the level of an investment currency,” Joachim Nagel, a board member at the Bundesbank, said in a speech in Frankfurt today. “It is only a matter of time before the renminbi becomes an international reserve currency,” he said, using another name for the yuan.

Frankfurt Marketplace

Bank of China will use a 10 a.m. cut-off time to clear onshore trades and 4 p.m. for offshore trades, Lutz Raettig, the head of lobby group Frankfurt Main Finance, said in an e-mailed statement. “I’m confident that with this offering, Frankfurt as a financial marketplace will draw payment and investment volumes to Germany in a very short space of time,” he said.

China, which is loosening exchange-rate controls in an effort to establish the yuan as a currency of global trade, also has agreements with financial centers including Hong Kong, Taipei, Singapore, Seoul, Paris and London. Chinese President Xi Jinping used his visit to Australia this week to appoint Sydney as the latest trading hub for his nation’s currency.

Reserve Bank of Australia signed a memorandum of understanding with the People’s Bank of China to establish yuan clearing in Australia, the RBA said in a statement on its website today. Australia also received a quota of 50 billion yuan ($8 billion) under the Renminbi Qualified Foreign Institutional Investor program for its financial institutions to invest in China’s domestic bond and stock markets.

Bid-Ask Spreads

Europe’s offshore yuan-trading market is already showing signs of increased liquidity, with the difference between bid and ask prices tightening, said Michael Rugilo, Asian specialist at Commerzbank AG’s Corporates & Markets division, who advises German and Asian clients from Frankfurt.

“The liquidity of renminbi in Europe is noticeable,” Rugilo said in an interview. “Even after trading closes in Asia, bid-ask spreads against the euro and the dollar stay attractive and this trend will be further strengthened by the renminbi hub in Frankfurt.”

Commerzbank, Germany’s second biggest lender, is seeking to increase usage of yuan by its corporate clients, particularly small-and-medium-sized companies.

Commerzbank is expecting a “marked increase in trade in renminbi-denominated currency and interest rate hedging instruments,” it said in a statement on Nov. 12. Yuan clearing in Frankfurt “will increase the share of German SMEs using the renminbi for their trade with China to well over the current 10 percent,” said Frank-Oliver Wolf, divisional head of cash management and international business.

Emerging Market

“It’s clear from our observations in the course of 2014 that the yuan is no longer an emerging market currency,” Sven Juergensen, head of forex sales for corporate clients at HSBC Holdings Plc in Germany, said in a Nov. 14 interview. “Trades can be conducted at any point in time at adequate spreads.”

One in three German companies pays and receives yuan in its business dealings, according to a survey by Deutsche Bank AG with the trade magazine “DerTreasurer.” An additional 17 percent plan to adopt the Chinese currency in the near future, according to the study, which was published Nov. 12.

The start of clearing in Frankfurt coincides with the opening of a link between the Shanghai and Hong Kong bourses, offering international investors a new route to China’s $4.2 trillion stock market. Bank of China’s Frankfurt branch has also received trading and clearing access at Deutsche Boerse AG, which provides Chinese issuers and Asian investors with direct access to German and European capital markets, the operator of the Frankfurt Stock Exchange said last week.

China, in July, awarded Germany a quota of 80 billion yuan that will allow domestic investors to buy securities in China under the Renminbi Qualified Foreign Institutional Investor program.

The number of banks permitted by the PBoC to clear yuan in Europe is growing as China seeks deeper integration with international markets. Since mid September, branches of Industrial and Commercial Bank of China Ltd. and Bank of China have received permits to clear yuan transactions in Luxembourg and Paris, respectively. China Construction Bank Corp was appointed as the clearing institution in London on June 18.

Before it's here, it's on the Bloomberg Terminal.