Bank of China

BOC Hong Kong fends off new competition in yuan trading

Gradual liberalisation of the renminbi sees Bank of China's HK unit step up marketing efforts after losing sole clearing bank status

PUBLISHED : Monday, 17 February, 2014, 4:47am
UPDATED : Monday, 17 February, 2014, 5:43am

The Hong Kong unit of the state-owned Bank of China is stepping up marketing of its improved clearing services to western financial institutions in Hong Kong after losing its status as the sole clearing bank for yuan last year.

Bank of China (Hong Kong), which is 66.06 per cent owned by Bank of China, is considering extending its operating hours to cater to demand from overseas customers, especially from the United States.

"We now have 217 participating banks and hope to add more," BOCHK's head of yuan business Yang Ruhai told the South China Morning Post.

The BOCHK's swift move to increase more market participants in the offshore yuan business is a reaction to intensifying competition. It is seen as a pragmatic sign of the gradual liberalisation of the tightly regulated currency control market, especially since Hong Kong, the testing ground for yuan internationalisation and the largest offshore deposit jurisdiction, plays an important role in the overall currency strategy.

Two state-backed lenders, Bank of China's branch in Taipei and Industrial and Commercial Bank of China's branch in Singapore, were designated by China's central bank as clearing banks, ending Bank of China Hong Kong's monopoly in the business.

Beijing now views a one-bank set-up as insufficient to satisfy global needs in the rapidly growing yuan market.

The yuan clearing business has been sought after by other lenders for many years, as a clearing bank would earn fees by settling offshore yuan payments between lenders and it has access to interbank bonds which offer much higher yields than offshore issues.

BOCHK still enjoys an unrivalled position in this business against the two new entrants, but bankers and analysts are sceptical on how it would be able to keep its market share.

But Yang is confident the lender's extensive global participant network will help the firm outshine its rivals. BOCHK cleared a combined 80 trillion yuan (HK$102 trillion) last year, of which 90 per cent was for settlements between offshore entities, he said.

In contrast, ICBC's Singapore branch posted business of 2.6 trillion yuan. Bank of China's Taipei branch recorded 2.4 trillion yuan in volume as of June.

In terms of clearing volume, the daily yuan clearing in Hong Kong stands at 600 billion to 700 billion yuan, while Singapore and Taiwan clear about 200 billion yuan every day.

Yang expected Beijing to remove hurdles for yuan internationalisation gradually. The next move this year is to double the trading band of the currency in the foreign exchange market from to 2 per cent to allow more volatility.

"The Chinese government will take a gradual and slow pace to relax the policies, otherwise it will have a strong impact on the economy," Yang said.

"If there is no more capital control on the mainland, the free fund flow may affect the economy. That's what the Chinese government will worry about."