Photographer: SeongJoon Cho/Bloomberg

Toronto's Yuan Clearing Hub Sees Slow Trading Start

  • Flows are up, but Canadian companies still slow to adopt RMB
  • Access to China’s corporate bond market may change picture

Three years after it opened amid much fanfare with the promise of paving the way to more trade between Canada and China, the yuan hub in Toronto has proven to be a bit of a dud.

Even as Prime Minister Justin Trudeau makes overtures to launch free trade talks with the world’s second-largest economy, Canadian firms have been slow to warm to the hub, which allows them to settle transactions in the Chinese currency with Chinese business partners.

“We expected a higher jump from the start point and it hasn’t happened,” said Min Gao, head of the treasury department at the Canadian unit of Industrial and Commercial Bank of China, which runs the hub’s clearing house. “But it’s still growing, and it’s healthy growth.”

The benefits of the hub, the first of its kind in North America when it opened in 2014, are obvious. Settling transactions in the yuan gives Canadian companies broader access to suppliers and customers in China, where many smaller firms only use yuan. It also helps firms in both countries avoid costly and time-consuming U.S. dollar intermediaries.

Yuan flows between China and Canada are up 67 percent since the hub was established, and the currency now accounts for 15 percent of all flows between the two countries, compared with a 70 percent share for the Canadian dollar, the Society for Worldwide Interbank Financial Telecommunication, a global payments network, reported in October.

Still, just 7 percent of Canadian companies use the Chinese currency, compared with a global average of 24 percent, according to a separate 2016 study by HSBC Bank Canada.

Broader Access

China has been boosting efforts to open its financial markets following the yuan’s addition to the International Monetary Fund reserve currency basket. While the U.S. dollar is still the global currency of choice, the use of the Chinese currency has been on the rise.

“There’s no question that we’re seeing an increased interest, in particular from onshore Chinese companies,” said Scott Lampard, managing director and head of global markets at HSBC Bank Canada. “There’s still some structural reforms or changes that the market would like to see that would bolster confidence in the currency as a reserve currency more from a store of value perspective.”

Chinese Bonds

In what may be a game changer for the hub, TMX Group Ltd., owner of the Toronto Stock Exchange, is working with Shanghai Clearing House to give Canadian investors access to China’s fledgling corporate bond market.

Once established, the link will allow for clearing and settling transactions from Toronto, with the project likely to see the first flows in 2018, says Glenn Goucher, president of TMX’s Canadian Derivatives Clearing Corporation.

“You’re not just trying to shift flows, you’re trying to increase the size of the pie,” Goucher said. “Our aspiration is to provide this service for the entire marketplace.”

China’s financial markets have already opened for some Canadian players. Bank of Montreal and HSBC’s Canadian units were authorized by the People’s Bank of China in November 2016 to become market makers for direct trading of yuan against Canadian dollars in China’s inter-bank foreign exchange market.

National Bank of Canada also issued its first panda bond, or yuan-denominated debt issued in China, in October 2016, and followed that up with another in September. British Columbia sold panda bonds last month, its fourth such transaction.

Dim Sum

Export Development Canada, a government agency supporting Canadian exporters, has issued dim sum bonds in China’s offshore yuan market, though it still does most of its business in U.S. dollars, said Susan Love, EDC’s deputy treasurer.

“If we started to see the contracts or the loans that we are providing were in the yuan, then obviously there would be more demand for that kind of financing,” she said. “But we’re not seeing that yet.”

It’s an education process that takes time, said Jennifer Reynolds, chief executive officer of the Toronto Financial Services Alliance, a lobby group that played a key role in setting up the hub. “We certainly would like to see greater adoption, but it’s early days,” she said.

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