In December 2010, Bank of China (BOC) became the first China state-owned bank to offer RMB trading services for US companies and individuals. Before that, US companies and individuals can already buy and sell RMB through Western banks such as the Hong Kong and Shanghai Banking Corporation (HSBC).
Although this BOC move can promote the use of RMB in international trade, it still has quite a long way to make RMB an alternative reserve currency because Chinese government ultimately controls the RMB liquidity taps in offshore markets and investing in mainland assets is also under strict control.
Similar to all other Chinese currency policies, RMB accounts in BOC-USA do have a certain limitations. Here is the summary:
|Personal customers||Corporate customers|
|Account types available||Saving and time deposit accounts.||Saving, time deposit and demand deposit account. Margin account is also available for Non-Deliverable Forward (NDF) trading.|
|Cash deposit or withdrawal||Not allow.||Not allow.|
|Currency exchange limit||Daily limit is USD 4K worth of RMB. Annual limit is USD 20K worth of RMB. N.B.: only Chinatown Branch offers this service.||No limit.|
|Remittance service||Daily limit of RMB 80K.||Limit and regulations set by People's Bank of China (PBoC) under the RMB trade settlement pilot program.|
|Service Branches||New York Branch and Chinatown Branch, with service limited to Great New York Metropolitan Area.||New York Branch, Chinatown Branch and Los Angeles Branch, with services limited to Great New York and Los Angeles Metropolitan Areas.|
The RMB trade settlement pilot program, firstly launched in July 2009, permits the use of RMB in cross-border trade between 5 pilot mainland cities and member countries of the Association of Southeast Asian Nations (ASEAN) with an intention to reduce settling trade in USD for Chinese importers and exporters.
The pilot program was then extended to cover 20 pilot mainland cities and provinces for trade settlement with all countries worldwide in June 2010, and was further extended to increase the number of domestic pilot enterprises significantly from 365 to 67359 in December 2010.
We disagree that the BOC move is only a small symbolic step, it should be considered a careful step to start with.
After all, currently there is a clear difference in interest rates between USD and RMB, and therefore the initial RMB demands in the US can be highly unpredictable.
Nevertheless, we believe the BOC move is actually driven by the market force.
HSBC has been very aggressively expanding its offshore RMB services around the world and already completed its first US cross-border RMB trade settlement transaction earlier on 30 September 2010.
Further on 8 October 2010, HSBC even settled trading of its first offshore RMB-denominated currency option, a better risk-hedging tool than RMB Non-Deliverable Forward (NDF) or Non-Deliverable Option (NDO) which are typically settled in USD rather than RMB.
That said, if Bank of China (BOC) does not step in quickly, it is possible that HSBC will become the RMB clearing bank in the US.
From Beijing's point of view, the Chinese BOC is obviously a better choice of RMB clearing bank than the British HSBC.
This is clearly a RMB business war. While HSBC may simply want to explore more RMB business opportunities, BOC's target as the RMB clearing bank in the US has its strategic need for better macroeconomic control on the currency.
With the RMB clearing bank status, BOC will be able to exert influence on RMB liquidity, exchange and interest rates in the US. Otherwise, we are afraid that Chinese regulators may not have enough confident to further accelerate the pace of RMB full liberalization.
If we have to compare, however, we would rather rate BOC (stock codes: 601988.ss for A-share and 3988.hk for H-share) a more attractive stock than HSBC (stock code: 005.hk) in the longer-term.
The RMB business war is of course not limited in the US, as BOC's overseas branches including London, Frankfurt, Tokyo, Canada, Singapore and Malaysia etc also began offering similar RMB services since early 2010.
Particularly in London, British customers can exchange for RMB not only in international banks like HSBC and BOC. Even the UK Post Office has also started providing RMB services with a daily exchange limit of GBP 5K since January 2011.
As there are almost 100 thousands Chinese students currently studying in the UK, the demands for RMB exchange business there are real. Along with London's unique role as a financial centre in Europe, London serves as another possible competitor as offshore RMB centre against Hong Kong.
Does HK need to be afraid that it will be replaced soon?
The answer is NO, as long as Hong Kong can keep providing more RMB investment products for offshore RMB deposit base than elsewhere in the world.
In reality, the Chinese central government has to support Hong Kong as the main offshore RMB centre especially during the start-up of RMB internationalization process, again because the Chinese regulators would believe it is easier to take macroeconomic control on RMB business in Hong Kong than in the UK or the US.