Swiss inch towards renminbi hub dream

AFP

News that Switzerland’s central bank recently opened talks with its Chinese counterpart to swap currencies has raised Swiss hopes of attaining a renminbi hub status. But Switzerland is playing catch-up with rivals that share the same ambition.

As global renminbi (RMB) transactions gather pace, a tantalising vision has emerged of a new international reserve currency competing with the dollar, euro and British pound. Financial centres are jostling to enjoy the prestige and profits of becoming RMB conduits.

In December 2012, the Swiss government officially announced its intention of becoming a renminbi hub, joining the likes of Britain, Canada, Germany and France in trying to woo Beijing.

The signing of a free trade agreement (FTA) with China earlier this year might give Switzerland a boost, according to Felix Sutter, head of PricewaterhouseCoopers’ Asia business group in Switzerland. But knowing how to win a renmini hub mandate from Beijing is hard to predict.

“China has always preferred bilateral negotiations, that are not always completely transparent, to pick RMB partners,” Sutter told swissinfo.ch. “Each country, at a specific time and under specific circumstances, has its own appeal.”

In addition to making sure the FTA runs smoothly, Switzerland might make itself more appealing by granting more visas for Chinese investors, Sutter suggested.

Growth of RMB trading

The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which processes global transactions, measures the popularity of currencies.

The Chinese renminbi shot up from being the 20th most popular currency for global payments in January 2012 to 12th in October 2013.

It occupies 8th position in the list of foreign currency exchange transactions (11th in January 2012).

The RMB is also the second most frequently used currency for trade finance transactions, commonly used by commodities traders – a booming business in Switzerland.

The Swiss Bankers Association believes that by 2020 the RMB could be a top three reserve currency.

Playing catch-up

There are fears that Switzerland might be left behind by rival countries, particularly Britain, which has leveraged its historical connection with Hong Kong to set up a currency swap arrangement and encouraged a number of Chinese banks to set up shop on British soil.

A central bank swap agreement allows high volumes of renminbi to enter a country, while an offshore branch of a Chinese bank is needed to process RMB transactions. Switzerland, so far, has neither element in place.

“The RMB is not a difficult currency to embrace from a financial point of view, but it might take some time for Switzerland to catch up operationally,” Julius Baer’s head of growth market investment consulting, Kerry Goh, told swissinfo.ch.

That has not stopped Switzerland’s financial centre from creating and trading RMB-denominated financial products, such as derivatives, bonds and funds.

Private banks have already opened thousands of accounts holding up to RMB20 billion in Switzerland, according to the Swiss Bankers Association (SBA).

Billions more are held by the Swiss funds industry or are traded via a range of financial products from Switzerland.

Renminbi or Yuan?

China’s currency, introduced in 1949 on the founding of the Communist People’s Republic of China, is officially known as renminbi. However, it is denominated in units known as yuan.

The dual name for the currency is similar to the terms sterling (renminbi) and pound (yuan) for the British currency.

Renminbi is roughly translated from Chinese as ‘people’s currency’.

The word yuan dates back to around the 16th century and was the local term for the Spanish silver dollar that was used for centuries by foreign merchants trading in China.

Closing the gap

Not all investors are convinced that Western capitalism and Chinese communism can prove a marriage made in heaven. But as Western governments increasingly chase the renminbi dream, these doubts might be dispelled, according to Kerry Goh.

“If Switzerland were to become an RMB hub, it would serve to add some legitimacy to the currency here and boost uptake of RMB products,” he told swissinfo.ch.

There are signs that Switzerland is moving to close the gap between itself and renminbi hub rivals.

In early December, the Swiss National Bank (SNB) said it had engaged with the People’s Bank of China to set up a swap arrangement, but declined to reveal what volume of currencies would be swapped or how long it would take to achieve this result.

The SBA said commercial Chinese banks had unofficially sent “encouraging signals” about setting up operations in Switzerland in future. It is hoped they would fare better than the Bank of China, which sold its Geneva operations in 2012 after a failed four-year stint in Switzerland.

Frontrunners

The SBA issued a report in July outlining potential benefits of renminbi hub status for other Swiss industries. These included: lowering exchange rate volatility risks, access to a wider array of suppliers in China and reducing operational costs on the Chinese mainland.

But other sectors, many of which trade extensively in China, have so far remained more reticent than the financial industry about the upside of greater exposure to the Chinese currency. No company contacted by swissinfo.ch was willing to comment.

There was also a muted response to a survey on the subject issued by the Swiss Business Federation (economiesuisse) two years ago, according to chief economist Rudolf Minsch.

Firms operating in China can already exchange US dollars for renminbi through Hong Kong. “There is no information suggesting this creates extra costs or causes serious problems, so some companies do not see the benefit of a Swiss renminbi hub,” Minsch told swissinfo.ch.

However, Minsch is convinced that such a development could indeed bring about savings for firms once they learned to use the system properly. With this in mind, it would be better to press ahead with establishing a Swiss renminbi hub before it is too late, he argued.

“History shows us that once frontrunners get ahead of others in a volume-intensive business it is harder for others to catch up and reach a similar size,” he said.