Swiss fall behind in race to become Chinese currency hub

The renminbi is gaining ground as a sought after currency Reuters

At first glance, Switzerland’s financial and commodity trading expertise plus strong political and economic ties to China make it an ideal trading hub for the renminbi. Yet it is losing out to competing countries such as Luxembourg.

Despite making some headway in the past 12 months, Switzerland’s relative lack of progress has caused frustration in some quarters.

“In Switzerland, there is a lot of talk about the renminbi, but nothing happens,” Michel Wohl, former head of Banque Internationale à Luxembourg, complained at a recent Foreign Banks in Switzerland Association (AFBS) press meeting.

Wohl said the Swiss finance sector was living in the past and accused of it of “arrogance”. He specifically pointed to a disagreement between the Bank of China and Swiss regulators that led to the Chinese bank withdrawing its subsidiary from Switzerland two years ago.

By contrast, Luxembourg has welcomed several European headquarters of Chinese banks and is set to boost the number of operations within its jurisdiction to six in 2015. No renminbi hub can function without at least one Chinese bank being present to clear renminbi transactions between the countries.

EU advantage

Wohl’s comments were perhaps a little harsh on Switzerland, which in June reached a major milestone by negotiating a currency swap arrangement between the Swiss National Bank (SNB) and its Chinese counterpart.

And efforts have not stopped there. SNB chairman Thomas Jordan followed up the swap agreement with a trip to China in August while Swiss Finance Minister Eveline Widmer-Schlumpf met the Chinese vice-minister of finance a month later to discuss Switzerland’s possible renminbi hub status.

But it is undeniable that Luxembourg, with a comparable financial services industry to Switzerland, has stolen a march. In 2015 it expects to expand the number of Chinese banks in its borders to six while one has just started operating as a clearing bank.

“This is such a small country it is very easy to access the government,” Elizabeth Adams of the business development agency Luxembourg for Finance told swissinfo.ch. “[The government] is known for its business-friendly attitude and making things possible earlier than in other countries.”

Luxembourg now hopes to gain Renminbi Qualified Foreign Institutional Investors (RQFII) status. This would allow its financial institutions to trade directly on the Beijing stock market.

 Adams also cites Luxembourg’s membership of the European Union as an advantage, just at a time when Switzerland’s EU relations have soured, raising fears that Swiss-based financial firms could face restricted access in Europe.

Welcome mat

In comments to the China Daily newspaper in March, Bank of China (BoC) Luxembourg general manager Zhou Lihong left no doubt that the grand duchy had laid out the right kind of welcome mat.

“Luxembourg’s regulators have extremely strict standards,” he said. “Since Luxembourg follows EU laws, there is no way that Luxembourg can be less strict than other EU countries. Where Luxembourg regulators have an advantage is their flexibility, efficiency and pragmatism. I think it is a very open relationship. We are working towards the same goal.”

By contrast, BoC exited Switzerland in 2012 reportedly because of differences with the Swiss Financial Market Supervisory Authority (FINMA). The failure to attract – and keep – a Chinese bank in Switzerland has annoyed banker turned Swiss People’s Party politician Thomas Aeschi.

“There does not seem to be too much interest from other Chinese banks about coming to Switzerland. If you look at Luxembourg, they are actively courting Chinese banks. We have several location promotion agencies, but none has been very successful so far,” the member of the rightwing party told swissinfo.ch.

“Not every country has the same regulatory standards, but it would be stupid not to get into a discussion on these grounds alone.”

FINMA denies that it has ever discriminated against Chinese banks but does not comment on individual cases.

“We are bound by a legal framework and treat every request for authorisation for a bank licence in the same manner,” spokesman Vinzenz Mathys told swissinfo.ch. “There is no country-specific approach.”

‘Golden opportunity’ lost

Much has been made in Switzerland of a free-trade agreement that came into force at the start of 2014. But even this was a source of some irritation to the AFBS as it failed to include a renminbi clearing facility for Swiss companies which trade in China.

“Switzerland lost a golden opportunity to be a leading mover and allow its companies to trade directly with Chinese counterparts in renminbi,” AFBS secretary-general Martin Maurer told swissinfo.ch.

“The free-trade agreement could have given Swiss firms permission to conduct the same banking services as a firm in China.”

This would have given companies far greater protection against exchange rate volatility in their CHF8.8 billion ($9 billion) export trade with China. Instead, Swiss companies are forced to go to Hong Kong, London or Frankfurt to make and receive payments in renminbi.

For Maurer, Switzerland has already fallen too far behind Luxembourg as a trader of renminbi-denominated bonds and funds to attempt to become a competitor in this field. Instead, he says Switzerland should concentrate on helping its own companies trade in China before it loses too much ground to competitor countries.

Julius Baer renminbi expert Jiazhi Chen Seiler disagrees, arguing that the Swiss financial sector has much to gain from developing its own range of fledgling renminbi products, such as bonds and derivatives. She believes Switzerland’s financial expertise and large client base are a perfect match for an increasingly sought-after currency from such a global economic powerhouse.

“Switzerland has significant wealth management and commodities trading businesses, so it really makes sense to offer a wider range of renminbi-denominated products to clients,” she told swissinfo.ch.