An Inside Look Into London's Quest for the Renminbi

RMB Tracker SPECIAL EDITION September 2019

An inside look into London’s quest for the renminbi

FX and payments in the midst of uncertainties Contents RMB Tracker

Foreword 3

Executive Summary 4

Key Insights 5 1 A global look at the RMB 6 1.1 The RMB remains competitive in uncertain times 6 1.2 Financial Institutions increasingly use RMB for payments 7 1.3 RMB’s usage in the FX market is still low 8 2 London as an FX centre 9 2.1 London - a major player in FX 9 2.2 London leads the RMB’s FX business 11 3 London as a payments hub 13 3.1 US-UK payment corridor dominates 14 3.2 Decline in euro use across the UK 15 3.3 UK - the world’s most important offshore RMB centre after Hong Kong 17 Conclusion 18

Note to the reader: The Chinese national currency is known officially as the “renminbi,” and usually shortened to RMB. The Chinese Yuan is the basic unit of renminbi, but is also used to refer to the Chinese currency generally. CNY is the ISO 4217 currency code for renminbi. When used offshore, the Chinese Yuan is referred to as CNH.

2 Foreword RMB Tracker

A special report for a unique event SWIFT is defined by its global community of 11,000 customers in over 200 countries I am delighted to present a special edition of and territories, and draws from the collective the SWIFT RMB Tracker for Sibos 2019, which resources of this community, to adapt and takes place in London from 23-26 September innovate to meet the needs of the industry 2019. through a variety of sandboxes and proof- of-concept developments. This approach Special reports, such as this, provide in- is facilitating the transformation of business depth insights into how currencies are used models and customer-centric innovation in for payments in a particular segment of the financial services. It also puts SWIFT at the market or geographical area. In addition to centre of the equation and enables us to offering a ranking of the renminbi (RMB) in report on developments that affect the global relation to other currencies worldwide, this economy – which increasingly include the Sibos special edition looks at the RMB and its RMB. adoption globally. I look forward to Sibos London, which The launch of the Cross-Border Inter-Bank will serve as an important opportunity Payments System (CIPS) by the People’s Bank to further the conversation around RMB By David Scola of China in 2015 represented an important internationalisation. Acting Head of North America, step towards RMB internationalisation. Since Americas & UK Regions, then, CIPS has facilitated RMB clearing and I hope you find this special edition of the SWIFT settlement for mainland Chinese financial SWIFT RMB Tracker insightful. institutions and companies conducting cross- border and offshore business, by creating a bridge between China and the rest of the world. Through RMB offshore centres such as London, CIPS has further paved the way for the local clearing of the RMB currency with the support of RMB-clearing banks appointed by the People’s Bank of China (PBOC).

Despite the current Brexit climate, confidence over London’s position for RMB trading activities remains strong. As a major foreign exchange centre, London offers the RMB substantial room to grow organically, with minimal institutional and political intervention. The city’s diverse investor profile and liquidity range are also catalysing this growth.

The Chinese currency is gaining traction. London, as the Foreign Exchange (FX) capital of the world, possesses all the right elements to help the RMB on this journey. Today, SWIFT’s multi-sided platform is helping its banking customers transact securely and reliably, comply with regulations, improve operational efficiency, and innovate at scale to serve their customers better.

3 Executive Summary RMB Tracker

A global look at the RMB London leads the RMB FX business. From an RMB perspective, the UK remains According to SWIFT data in July, the UK the most important offshore RMB centre The RMB’s share in the global payments is responsible for 33.79% of the world’s outside of Asia. market remains robust, coming in at fifth RMB FX transactions. This puts the country place as of August 2019. The share of the ahead of the acknowledged RMB economy London is well ahead of its nearest rivals, RMB across global payments increased by heavyweights, Hong Kong and China, which including Singapore and South Korea. 28 basis points during the last 24 months account for 19.22% and 16.28% respectively. Although the UK’s 6.18% share of global (August 2017 to August 2019). However, we RMB transactions is much smaller than Hong can expect a slowdown in economic activity London as a payment hub Kong’s, it is the largest outside of Asia, and over the coming year, because of tariffs slightly more than 2.5 times the size of the imposed by the United States and a weak London has built a robust payment next closest non-Asian country – the United global demand. infrastructure to handle its own domestic States. needs as well as the sheer volume of An increase in the number of financial payments passing through the country. institutions using the RMB for payments has The Bank of England (BOE) is undertaking been observed globally, up 11.31% in July initiatives to strengthen the country’s core 2019 compared with July 2017, taking the payments architecture. The Clearing House total from 1,989 to 2,214. Automated Payment System (CHAPS) uses the SWIFT FIN Copy service, in which SWIFT The biggest increase – 20.98% – is seen provides the transport network and message in Africa and the Middle East, in which handling functionality. the number rose from just 143 financial institutions in July 2017 to 173 in July this According to SWIFT data, payments in the year. The growth in the number of financial UK originate mainly from the US, accounting institutions using the RMB for payments is for approximatively one-third (31.30%) of all largely driven by China’s efforts in Africa. payments inflows. This is more than twice the Under the Belt and Road Initiative (BRI), China share of the next biggest player – Germany – has implemented a mutual development which accounts for 13.95%. agenda with Africa, which appears to be gaining traction. The popularity of particular currencies used for payments in the UK has, for the most From an FX perspective, the RMB’s usage part, remained steady in recent years. But, in the FX Market is still low. Utilisation of late 2018 figures show that euro volumes the RMB across these instruments may be plummeted, while the US dollar has made up considered nascent at best. SWIFT data for this shortfall. As of July 2019, according shows that while the RMB appears within to SWIFT data, the euro’s share of currencies the top 10 currencies across various FX used for cross-border payments stood at instruments, in terms of weight, the RMB 26.18%, while the US dollar’s climbed to represents less than 3.00% of activity share 38.99%. for these instruments combined. The decline in the euro’s share can largely be London as an FX centre attributed to Brexit’s implications on financial services. To mitigate risks and reduce the London takes the crown as the world’s impact on businesses, many entities with biggest foreign exchange centre. In the headquarters or operational bases in London context of Brexit, a level of volatility has been have chosen to either set up new entities or observed and London recently hit a record relocate to other regions. high in FX trading volumes. SWIFT data, excluding trades settled in Continuous Linked Based on SWIFT data, while euro- Settlement (CLS), also confirms that from a denominated flows from the UK declined booking perspective, London is the largest by about 39.41% over the past year, Ireland FX trading centre, accounting for an activity seemed to benefit from the current uncertainty share of 40.14%, followed by the United around the impact of Brexit and nearly 300% States (12.93%), France (7.67%), and Hong was seen in the growth of corresponding Kong (4.39%). payment volumes.

4 Key Insights RMB Tracker

As of August 2019, the RMB’s share as a global payments currency is 2.22%. 2.22% When excluding intra - eurozone payments, the activity share is lower at 1.42%.

Globally, there are 2,214 financial institutions using the RMB for payments in July 2019. This represented an increase of 11.31% as compared to two years ago. 2,214 Of which, 1,480 financial institutions involved China or Hong Kong in making international RMB payments, while the remaining 734 banks used RMB for payments without involving those markets.

According to SWIFT data, London leads the FX business for the RMB. The UK 33.79% handles 33.79% of the world’s RMB offshore FX transactions.

USD is a key currency used for cross-border payments done by the UK, with 38.99% of activity share year-to-date. However, the use of euros fell to 26.18% 38.99% in the same period.

Hong Kong remains the largest RMB-clearing centre globally, with a 76.36% share of RMB activity outside Mainland China, followed by the UK at 6.18% of 76.36% activity share.

There are 24 official RMB clearing banks appointed by the People’s Bank of China. The latest one is in Japan, with the MUFG Bank operating as an 24 official clearing bank.

5 1 A global look at the RMB RMB Tracker

1.1 The RMB remains competitive in 24 months (August 2017 to August 2019). uncertain times SWIFT data shows that RMB usage accounts for 2.22% as a global payment currency SWIFT data shows that the RMB is in August 2019. Excluding intra-Eurozone maintaining its share across the global payments, the RMB’s share is lower with an payments market, coming in fifth place as activity share of 1.42% in August 2019. of August 2019. According to the Bank of China, its Cross-border RMB Index (CRI) for This incremental shift is in spite of China’s the second quarter rose by 6 points to reach slower manufacturing and exports levels. 302. This was attributed to an increase in the According to China’s National Bureau of volume of RMB used in cross-border goods Statistics’ July data, growth in industrial trade settlements1. production grew by just 4.80% year-on-year2. This is due in part to the Chinese authorities’ The share of the RMB across global payments effort in deleveraging the economy to ensure increased by 28 basis points during the last more sustainable growth3.

RMB’s share as a global payments currency Live and delivered, MT 103 and MT 202 (Customer initiated and institutional payments) Messages exchanged on SWIFT. Based on value. August 2017 August 2019

1 USD 40.72% 1 USD 42.52% 2 EUR 32.91% 2 EUR 32.06% 3 GBP 7.05% 3 GBP 6.21% 4 JPY 3.01% 4 JPY 3.61% 5 CNY 1.94% 5 CNY 2.22% 6 CAD 1.75% 6 CAD 1.76% 7 CHF 1.63% 7 AUD 1.57% 8 AUD 1.50% 8 HKD 1.48% 9 HKD 1.32% 9 THB 1.00% 10 THB 1.07% 10 SGD 0.98% 11 SEK 0.89% 11 CHF 0.81% 12 SGD 0.83% 12 SEK 0.79% 13 NOK 0.70% 13 NOK 0.71% 14 VEF 0.53% 14 PLN 0.56% 15 PLN 0.49% 15 MYR 0.43% 16 ZAR 0.43% 16 DKK 0.42% 17 MYR 0.39% 17 ZAR 0.40% 18 NZD 0.35% 18 NZD 0.31% 19 DKK 0.33% 19 MXN 0.29% Source: Watch - 20 MXN 0.31% 20 CLP 0.24% Powered by SWIFT BI RMB’s share as a global payments currency – Excluding payments within the Eurozone Live and delivered, MT 103 and MT 202 (customer initiated and institutional payments), excluding payments within the Eurozone Messages exchanged on SWIFT. Based on value. August 2017 August 2019

1 USD 43.54% 1 USD 48.50% 2 EUR 35.41% 2 EUR 30.80% 3 GBP 3.76% 3 JPY 4.20% 4 JPY 3.71% 4 GBP 3.61% 5 CHF 2.71% 5 CAD 2.22% 6 CAD 2.28% 6 AUD 1.54% 7 AUD 1.40% 7 CNY 1.42% 8 CNY 1.13% 8 CHF 1.30% 9 HKD 0.92% 9 HKD 0.93% 10 SEK 0.69% 10 SEK 0.73% 11 NOK 0.56% 11 NOK 0.63% 12 MXN 0.43% 12 DKK 0.47% 13 TRY 0.42% 13 SGD 0.46% 14 NZD 0.42% 14 MXN 0.43% 15 DKK 0.34% 15 PLN 0.38% 1 16 PLN 0.34% 16 NZD 0.37% http://n.sinaimg.cn/finance/ 17 SGD 0.34% 17 RUB 0.32% a52b68a9/20190821/ZhongXing.pdf 18 ZAR 0.26% 18 TRY 0.27% 2 http://www.stats.gov.cn/english/ 19 RUB 0.26% 19 ZAR 0.25% PressRelease/201908/t20190814_1691072.html Source: Watch - 20 CZK 0.25% 20 CZK 0.21% 3 https://www.bis.org/publ/arpdf/ar2019e.pdf Powered by SWIFT BI 6 1 A global look at the RMB RMB Tracker (continued)

Number of financial institutions using the RMB for payments Live and delivered, MT 103 and 202 sent and received

2,214

1,989

1,034 922

808 748

199 176 173 143

Jul-17 Jul-19 Jul-17 Jul-19 Jul-17 Jul-19 Jul-17 Jul-19 Jul-17 Jul-19

Share of 9.40% 11.62% RMB users 12.65% 14.28% 21.45% 24.34% 41.68% 46.62% 23.10% 26.29% rca Me a erca re r

Source: Watch - Powered by SWIFT BI

1.2 Financial Institutions increasingly use institutions, with the addition of over 112 trading in third-party currencies. RMB for payments new ones. Europe demonstrated a more modest growth of 8.02% with the addition Robust expansion into Africa and the An increase in the number of financial of 60 institutions, while the Americas saw an Middle East institutions using the RMB for payments has increase of 23. been observed globally. It was up 11.31% in The increase in the number of financial July 2019 compared with July 2017, taking In parallel, increased access to the RMB institutions using the RMB for payments is the total from 1,989 to 2,214. Of which, 1,480 in international trade has helped to make largely driven by China’s efforts in Africa, the financial institutions involved China or Hong the currency even more popular. Financial Middle East, and Asia. Kong in making international RMB payments, institutions are key enablers when it comes while the remaining 734 banks used RMB for to supporting the needs of their corporate With the Belt and Road Initiative (BRI), China payments without involving those markets. customers transacting with China. As has implemented a mutual development explained in the RMB payments guide agenda with Africa, which appears to The biggest increase – 20.98% – can be seen published last year4, a corporate trading with be gaining traction. According to Caleb in Africa and the Middle East, in which the China enjoys a number of advantages when Fundanga, Executive Director of the Macro number rose from just 143 financial institutions paying in RMB. Reduced costs, the facilitation Economic and Financial Management Institute in July 2017 to 173 in July this year. of commercial discussion, and access to a (MEFMI) of Eastern and Southern Africa, larger supplier base in China are some of central bank officials and finance ministers Asia Pacific saw a lower percentage gain, these benefits. The use of the RMB also helps in 14 African countries are now planning on coming in at 12.15% over the last two years. to simplify internal processes by removing introducing the RMB as a reserve currency, Still, the region is ahead in terms of actual documentation complexities arising from while countries including Rwanda have already

4 https://www.swift.com/resource/rmb-tracker-sibos-2018-edition

7 1 A global look at the RMB RMB Tracker (continued)

done so. This allows for expansion of its use 1.3 RMB’s usage in the FX market is still The data shows the RMB appearing in the top across the entire continent5. low 10 places across various FX instruments. In terms of weight, the RMB represents less than There have been several key developments The following table shows the RMB ranking 3.00% of activity share for these instruments in the Africa region. Li Feng, who heads the in terms of total notional value of Foreign combined. In addition, the top two currencies Tanzania office at the Bank of China, believes Exchange (FX) instrument types, as compared for each of the instrument types accounts that the signing of currency swap agreements, with other major currencies. It is based on for more than 50% of the activity share. promotion of direct exchange and listing SWIFT data derived from MT 300 and MT 305 Therefore, the utilisation of the RMB across of transactions with the RMB, as well as confirmation messages for July 2019. these instruments might be considered the pricing of bulk commodities, are three nascent at best. strategic directions for expanded interaction between China and Africa. Countries such as Kenya, Zimbabwe and Botswana are also showing strong interest in using the RMB as a Currency Rank per FX Instrument Type reserve or settlement currency5. Live and delivered, MT 300 and MT 305, including central banks’ traffic July 2019, by value In the Middle East, China is already the United Arab Emirates’ largest trading partner, POSITION FORWARD NDF* SPOT SWAP OPTION and the Dubai Port is a vital shipping and 1 USD USD USD USD USD logistics hub for Chinese goods. More than 200,000 Chinese nationals live in the United 2 EUR KRW EUR EUR EUR Arab Emirates (UAE), which is giving rise 3 CHF BRL GBP JPY GBP to increased trade flows between the two regions. 4 JPY TWD JPY GBP AUD

5 GBP CLP CHF CNY JPY Strong support for ASEAN 6 AUD CNY AUD AUD NZD

In Asia, China is supporting countries in 7 CAD IDR CNY CHF CNY ASEAN6 by positioning the Guangxi7 province 8 NZD EUR CAD CAD CAD as the region’s financial gateway to China. According to a statement issued by the 9 CNY COP SEK HKD MXN

PBOC, this is to facilitate cross-border 10 SEK JPY NOK SGD BRL trade settlement, currency transactions, investment and financing in the Chinese *NDF refers to non-deliverable forward economy – especially in the use of the RMB in commodities trading and RMB-denominated Source: Watch - Powered by SWIFT BI lending projects in ASEAN8. The five year plan running until 2023 is likely to have a positive impact on the number of financial institutions that use the RMB for payments.

5 http://www.xinhuanet.com/english/2018-08/17/c_137397560.htm 6 http://www.chinadaily.com.cn/a/201901/12/WS5c39c047a3106c65c34e40ec.html 7 Guangxi is an autonomous region in China that is bounded by other provinces and Vietnam borders it near the south-west region. The plan focuses on the region’s capital, Nanning (specifically in Nanning Core Area) to provide an open financial gateway for ASEAN http://govt.chinadaily.com.cn/a/201907/10/WS5d2535d9498e054923eafb97.html 8 https://www.reuters.com/article/us-china-yuan-asean/china-promotes-use-of-yuan-among-southeast-asian-nations-idUSKCN1P51EV

8 2 London as an FX centre RMB Tracker

2.1 London - a major player in FX SWIFT data, which does not include trades settled in Continuous Linked Settlement The FX market is the world’s largest and (CLS) also confirms that from a booking most liquid financial market. The high level of perspective, London is the biggest FX trading liquidity enables participants to enter and exit centre, accounting for 40.14% of activity the market easily and almost instantaneously. share, followed by the United States (12.93%), As a result, FX is the single largest driver of France (7.67%), Hong Kong (4.39%), international financial flows. Switzerland (4.20%), and Germany (3.94%).

While New York City, Tokyo, Hong Kong and London’s FX success is driven by the following Singapore are all important FX hubs, London factors: takes the crown as the world’s biggest foreign exchange centre. In the context of The high level of liquidity enables the market Brexit, there has been a level of volatility, and to easily absorb the impact of large deals. London recently hit a record high in FX trading Sizeable trading volumes such as these volumes. According to the semi-annual FX benefit the biggest players most, enabling turnover survey conducted by the Bank of them to buy and sell relatively large amounts England (BOE), the average daily FX turnover of currency without significantly affecting in the United Kingdom was USD 2.86 trillion prices. in April 20199. This represents an increase of 12% over a span of six months, and a 7.11% rise from the previous record high of USD 2.67 trillion that was reported in April 201810. The size of the global market in 2016 was around USD 5.1 trillion. In other words, these results show that the UK represents well over half of the total FX market globally.

Top Financial Centres by FX Instrument Type - Traded in All Currencies, excluding trades settled in CLS Live and delivered, MT 300 and MT 305, including central banks’ traffic July 2019, by value

Grand Total

FX Option

Swap

NDF

Forward

Spot

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

United Kingdom United States France Hong Kong Switzerland Germany Australia Japan Canada Singapore The rest of the world Source: Watch - Powered by SWIFT BI

9 https://www.bankofengland.co.uk/-/media/boe/files/markets/foreign-exchange-joint-standing-committee/semi-annual-fx-turnover-survey-results/2019/april-2019-results. pdf?la=en&hash=9098BA25186F312DFDB78F76CF6A84E5E5037E27 10 https://www.bankofengland.co.uk/-/media/boe/files/markets/foreign-exchange-joint-standing-committee/semi-annual-fx-turnover-survey-results/april-2018-results. pdf?la=en&hash=41191888F14FC6969E1DE4DCAC80B9DF2F09D4F8

9 2 London as an FX Centre RMB Tracker (continued)

In addition to its prime geographic location, The slowing global economy and increasing London-based institutions also enjoy access Brexit worries have prompted the BOE to cut to a sophisticated and reliable infrastructure, its growth forecast. The Governor believes which enables trades to be executed swiftly that, until these factors are resolved, shifting and seamlessly. This makes moving financial perceptions will drive volatility in market operations elsewhere difficult and expensive. interest rates, equity prices and currency values. Indeed, they have already led to a At the same time, the light-touch regulations major depreciation of the British pound, which in the London FX industry have made the city now sits at a near three-year low against a a more attractive destination than New York, basket of other major currencies. which is encumbered with stricter regulatory requirements. With Brexit developments likely to push the British pound further down against the There are other factors that play to London’s euro, derivatives demand is likely to grow. advantage. These include proximity to other Companies will use more FX forwards, banks, which increases the ease of doing options, and swaps to hedge against future business, as well as the city’s tremendous swings in the value of currencies12. strength in commodities trading. In addition, the use of English, which has become the pre- According to SWIFT data, the largest volumes eminent language of international business, is for FX instruments worldwide are spots and also a tremendous benefit. swaps, accounting for 41.83% and 39.02% respectively. This breakdown is largely similar Challenges for the City to the one in the UK. However, spots have the largest share in the London FX market, at The Governor of the Bank of England, Mark 50.88%, compared to swaps and forwards, Carney, recently remarked that, “profound which land at 31.52% and 7.09% respectively. uncertainties over the future of the global trading system and the form that Brexit will take are weighing on the UK’s economic performance”11.

Share per Instrument Type: Worldwide and in the United Kingdom Live and delivered, MT 300 and MT 305, including central banks’ traffic July 2019, by value r e

rar rar

a a

Source: Watch - Powered by SWIFT BI

11 https://economictimes.indiatimes.com/markets/stocks/news/bank-of-england-cuts-growth-forecasts-as-brexit-and-global-worries-mount/articleshow/70485700.cms 12 https://www.bloomberg.com/news/articles/2019-01-21/brexit-forces-equity-foreign-exchange-markets-to-leave-london

10 2 London as an FX Centre RMB Tracker (continued)

2.2 London leads the RMB’s FX business In all FX instruments except for swaps, the UK dominates in terms of market activity – and Strategically located halfway in between frequently by a large margin. For example, in the US and Asia, London bridges the terms of options, it accounts for 53.80% of time differences between both territories, activity, with the next closest players being establishing itself as the centre of the global Switzerland at 9.89%, the United States and over-the-counter (OTC) market. France, both coming in at 8.78%, and China at 8.24%. The difference is just as dramatic According to SWIFT data in July, the UK in non-deliverable forwards, where the UK is handles 33.79% of the world’s RMB offshore responsible for 50.32% of activity, putting it FX transactions. That puts the country well ahead of France at 12.50%, Hong Kong ahead of the acknowledged RMB economy at 10.40% and the United States at 9.27%. heavyweights, Hong Kong and China, which account for 19.22% and 16.28% respectively. On the forwards front, the UK represents The UK also eclipses the next strongest player 40.73% of all activity – nearly three times the - the US - which registers only 7.29%. United States’ share of 14.22% and Hong Kong’s 10.28%. The country is also ahead in the spot arena, registering 40.58% compared to Hong Kong at 17.66% and China at 11.78%.

Top Financial Centres by FX Instrument Type - Traded in RMB Live and delivered, MT 300 and MT 305, including central banks’ traffic July 2019, by value

Grand Total

FX Option

Swap

NDF

Forward

Spot

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

United Kingdom Hong Kong China United States Singapore France Switzerland Japan Australia Taiwan The Rest Source: Watch - Powered by SWIFT BI

11 2 London as an FX Centre RMB Tracker (continued)

Average Daily Turnover of RMB FX in London According to SWIFT data, the RMB FX turnover in London has increased rapidly over

90,000 the past four years. This can be seen when comparing July YTD to the same period in 80,000 2018, where growth was 25.22% in gross turnover and 21.34% in daily averages. 70,000 As China’s currency is increasingly used as 60,000 a tool for international trade settlement and

50,000 financial transactions, the volume of FX activity has grown rapidly in terms of overall value. 40,000 As a result, London has become one of the world’s key hubs for RMB trading. 30,000 The trigger for London’s rise can be attributed 20,000 to China’s decision in September 2011 to

10,000 designate London as an offshore trading centre for the RMB. By the end of 2014, 0 London accounted for more than 40% of all offshore RMB trading, and was quickly 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 catching up with Hong Kong. In the same FX spot Forwards FX swaps FX options Other year, the UK became the first western government to issue RMB-denominated Source: Bank of England 13 bonds .

According to BOE data, FX turnover of financial instruments. The average daily Furthermore, China sees London as a offshore RMB in London has increased turnover rose by 30.06%, from GBP 60 billion strategic location to introduce Chinese capital steadily in recent years – both overall as in Q1, 2018 to GBP 78 billion in Q1, 2019. markets to foreign investors14. It has launched well as across the trade volumes of different the London-Shanghai Stock Connect, with Huatai Securities Co Ltd being the first company to trade. Chinese firms are now Evolution of UK Annual Gross RMB Turnover (Full Year and YTD) able to list A-Shares via Global Depository Live and delivered, MT 300, including central banks’ traffic. Gross value of all trades where at Receipts (GDRs15) on the London Stock least one of the parties is in the UK, for the FX instruments spot, forwards, and including open Exchange (LSE), while London firms are able and close legs for non-deliverable forwards and swaps. to list Chinese Depository Receipts (CDRs) in FY2016 – FY2019 Shanghai. Although Stock Connect was only launched in June this year, it has helped boost r RMB trading and investment activities. YTD (Jan – Jul) -10.45% +22.83% +25.22% Daily Average -4.50% +22.43% +21.34%

13 https://www.ft.com/content/9fd82346-0cf2-11e6- b41f-0beb7e589515 14 https://www.ft.com/content/3e47f0c6-2acb-11e9- a5ab-ff8ef2b976c7 15 GDRs are issued by a company outside of their home country and United States. In this case, investors can purchase Chinese shares through LSE via GDRs. CDRs are a form of GDRs, they are RMB- denominated securities that trades like a common share and enables foreign companies to raise capital from the Chinese investors.

2016 2017 2018 2019 Source: Watch - Aug - Dec YTD (Jan - Jul) Daily Average Powered by SWIFT BI

12 3 London as a payments hub RMB Tracker

Cities like London check all the boxes The BOE has been actively researching how ranging from tax attractiveness to currency technology is changing financial services environment, government incentives and today, and how they might evolve over the access to capital markets. London is part of next decade. In light of the rapid changes the world’s largest tax treaty network, and in payments, the BOE is undertaking two has agreements with 140 countries. Factor in major, closely-linked initiatives to strengthen advanced banking facilities, an experienced the country’s core payments architecture. It talent pool and advanced IT and telecoms is renewing its Real Time Gross Settlement systems, and it is easy to see why many (RTGS) service, and bringing the operation banks have established offices in the United of CHAPS into the bank. CHAPS uses the Kingdom, primarily in London. SWIFT FIN Copy service, in which SWIFT provides the transport network and message These advantages have inevitably led to handling functionality. London becoming a leading global payments hub. However, London’s position may change over time. The tide of RMB clearance could shift as Chinese companies look for opportunities in Asia, and an increasing number of Chinese online payment platforms across Southeast Asia explore opportunities in regional hubs.

Financial services firms using London to access the European Union (EU) market and leveraging London’s extensive ecosystem, are also waiting to see how the relationship between the UK and the EU pans out following Brexit.

Despite these challenges, London managed to secure second place in the Global Financial Centres Index (GFCI) March 2019 rankings – just behind the overall leader, New York City16.

A Robust Payment Infrastructure

London has built a robust payment infrastructure to address its own domestic needs, as well as the sheer volume of payments passing through the country. Victoria Cleland, the Bank of England’s Executive Director for Banking, Payments and Financial Resilience revealed in a speech late last year that UK payment systems processed more than 26 billion transactions worth more than GBP 91 trillion in 201717.

16 https://www.longfinance.net/programmes/financial-centre-futures/global-financial-centres-index/gfci-25-explore-data/gfci-25-rank/ 17 https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/transforming-our-payments-infrastructure-speech-by-victoria-cleland. pdf?la=en&hash=131E13DD5E36EE7A1479AF000F197053BD93E7B6

Source: Watch - Powered by SWIFT BI 3 London as a payments hub RMB Tracker (continued)

3.1 US-UK payment corridor dominates The outlook for outbound payments (as of July 2019) is largely similar. The US is the largest According to SWIFT data, approximatively destination for UK payments, registering one – third (31.30%) of all payments inflows 22.31%. Germany comes in second at into the UK originate from the US. This is more 11.36%, while France is third at 10.45%. than twice the share of the next biggest player – Germany – which sits at just 13.95%. While inbound payments traffic saw Luxembourg and Switzerland in fourth and Top sender countries for payments fifth places respectively, Hong Kong (5.61%) received by the United Kingdom and Japan (5.02%) maintain their hold on Live and delivered, international MT 103 and these positions when it comes to outbound MT 202 sent by value, July 2019 YTD payments.

These large payment flows are also in line United with Q2, 2019 trade data provided by the Germany States 13.95% UK’s Office for National Statistics, which 31.30% France suggests that these countries represent the 9.04% UK’s top trading partners. Collectively, their total exports are worth GBP 160.6 billion and Luxembourg represent imports of GBP 164.9 billion18. The 5.78% Others products that were traded amongst these 34.74% Switzerland countries are generally value-added products, 5.18 which include automobiles, pharmaceutical products, refined oil products, and aircraft. Source: Watch - Powered by SWIFT BI However, it is also important to note that despite China representing 9% and ranking second in the UK’s overall imports in 201818, Top beneficiary countries for payments it is not in the top five countries for payments done by the United Kingdom sent or received by the UK. The disparity Live and delivered, international MT 103 and between payment and trade numbers MT 202 sent by value, July 2019 YTD could be due to the need for documentary trade products when it comes to managing relationships between countries. United States Germany 22.31% 11.36% France 10.45%

Hong Kong 5.61%

Others 45.26% Japan 5.02%

Source: Watch - Powered by SWIFT BI

18 https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/june2019

14 3 London as a payments hub RMB Tracker (continued)

3.2 Decline in euro use across the UK volumes have plummeted, while the US dollar has made up for this drop. As of July 2019, The popularity of particular currencies used according to SWIFT data, the euro’s share of for payments with the UK has, for the most currencies used for cross-border payments part, remained steady in recent years. But, was at 26.18%, while the US dollar moved to while the volume of the two biggest players 38.99%. – the dollar and the euro – used to be almost identical, late 2018 figures show that euro

Evolution of top currencies used for cross-border payments done by the UK Live and delivered, international MT 103 and 202 sent and received by the United Kingdom by value, since January 2016

er R B B R

201601 201603 201605 201607 201609 201611 201701 201703 201705 201707 201709 201711 201801 201803 201805 201807 201809 201811 201901 201903 201905 201907

Source: Watch - Powered by SWIFT BI

The decline in the euro’s share can largely be roles from the UK to other European financial attributed to Brexit’s implications for financial hubs to maintain their services for EU clients20, services. Prior to Brexit, authorised financial provided that the financial institution has businesses in the UK used to operate freely banking licenses in that region. across the European Economic Area through a system known as passporting. This allowed Popular financial hubs for relocation include businesses in the EU the same access to Frankfurt, Luxembourg, and Dublin. Banks, the UK market as local ones19. The vote for such as Morgan Stanley and Mizuho, have the UK to leave the EU meant that financial chosen Frankfurt as their new base, while business in both regions could lose access to others, like Bank of America, have moved their passporting. banking and markets operation to Dublin21. Currently, Dublin remains the most popular To mitigate risks and the impact on European city for relocation, according to the businesses, many entities with headquarters EY Financial Services Brexit Tracker22. or operational bases in London have chosen to either set up new entities or relocate to Aside from relocation, there have been other regions. Banks, such as J.P. Morgan, changes to banking operations in certain would have to shift about 4,000 of its 16,000 institutions. According to Sulabh Agarwal,

19 http://researchbriefings.files.parliament.uk/documents/CBP-7628/CBP-7628.pdf 20 https://www.irishtimes.com/business/financial-services/jp-morgan-s-dimon-sees-gradual-uk-finance-job-moves-after-brexit-1.3826226 21 https://www.reuters.com/article/us-britain-eu-banks-factbox/factbox-impact-on-banks-from-britains-vote-to-leave-the-eu-idUSKBN1O31F9 22 https://www.ey.com/uk/en/newsroom/news-releases/190320-fs-brexit-tracker 15 3 London as a payments hub RMB Tracker (continued)

Managing Director of Payments at Accenture, Mechanisms (CSMs), such as TARGET2, EBA financial institutions are planning for a EURO1 and EBA STEP2, during the post “hard” Brexit scenario. Banks are assessing Brexit transitional period23. If this happens, alternatives, ranging from liquidity, payments, banks would need to reroute transactions to and cash management, to euro-denominated other countries that are able to offer euro- products. The UK could potentially be denied clearing services. access to euro Clearing and Settlements

Evolution of top currencies used for cross-border payments done by Ireland Live and delivered, international MT 103 and 202 sent and received by Ireland by value, since January 2016

R B

201601 201603 201605 201607 201609 201611 201701 201703 201705 201707 201709 201711 201801 201803 201805 201807 201809 201811 201901 201903 201905 201907

Source: Watch - Powered by SWIFT BI

Based on SWIFT data, while euro- Brexit on major financial services firms has denominated flows from the UK declined amounted to nearly GBP 4 billion, inclusive of by about 39.41% over the past year, relocating staff and operations, legal advices, Ireland seems to be benefiting from the contingency provisions, and capital injections current uncertainty around the impact of to scale new non-UK headquarters22. Brexit. Growth of nearly 300% was seen in corresponding payment volumes. As of 31 May 2019, the direct financial impact of

22 https://www.ey.com/uk/en/newsroom/news-releases/190320-fs-brexit-tracker 23 https://bankingblog.accenture.com/brexit-impact-payments?lang=en_US

16 3 London as a payments hub RMB Tracker (continued)

3.3 UK - the world’s most important Meanwhile, RMB internationalisation efforts offshore RMB centre after Hong Kong continue to push ahead. On 26 October 2018, China and Japan signed a three year currency Offshore RMB clearing centres are driving swap agreement worth USD 30 billion. The greater use of China’s currency in global Bank of Japan (BOJ) also signed a separate trades. Hong Kong is regarded as the world’s memorandum of understanding with the largest offshore RMB economy in terms of PBOC to establish an RMB clearing bank in volume. But the next largest player – London Japan24. This lets BOJ provide the required – is well ahead of its nearest rivals, including RMB liquidity in the event that Japanese Singapore and South Korea. Although the financial institutions face unexpected UK’s share of global RMB transactions difficulties with RMB settlements. (6.18%) is much smaller than Hong Kong’s, it remains the largest outside of Asia, and More recently, on 27 June 2019, MUFG slightly more than 2.5 times the size of the Bank announced that it has become the first next closest non-Asian country – the United Japanese bank to be designated by the PBOC States. as an RMB-clearing bank25. The establishment of an RMB-clearing mechanism in Japan will The UK is also steadily extending its lead facilitate cross-border transactions between against offshore RMB economies, thanks in financial institutions and enterprises in both no small part to strengthening its ties with countries. As of today, there are 24 RMB- China. This has enabled the UK to increase its clearing banks with the inclusion of Japan. weightage by 0.99% compared with August The addition of a new RMB-clearing bank 2017. is also expected to further accelerate RMB internationalisation.

Hong Kong 76.36%

United Kingdom 6.18%

Singapore 3.38%

United States 2.44%

Taiwan 2.43% Clearing centres

Non-clearing centres South Korea 2.19%

France 1.53%

Australia 1.07%

Japan 0.96% T re RMB Germany 0.54% ece e

Canada 0.52%

Macau 0.48% Live and delivered, MT 103 and 202 (Customer initiated and institutional Netherlands 0.28% payments). Inbound + Outbound traf c. Based on value. Excluding China. Luxembourg 0.26%

Belgium 0.23%

24 https://www.reuters.com/article/us-china-japan-agreements-swap/china-japan-sign-three-year-fx-swap-deal-to-strengthen-financial-stability-business-activity- idUSKCN1N00GD 25 https://www.bk.mufg.jp/global/newsroom/news2019/pdf/newse0627.pdf

17 Conclusion RMB Tracker

London to remain a key FX and payments player

The UK remains a leader in global FX despite the challenges created by the ongoing uncertainties over Brexit, and continues to be a vital piece in China’s RMB internationalisation efforts. China clearly still views London as a strategic location for introducing Chinese capital markets to foreign investors. For example, earlier this year it launched London-Shanghai Stock Connect, allowing foreign firms to list their shares in mainland China for the first time.

The UK also benefits as a large payments hub due to a host of positive factors – from tax attractiveness to its currency environment, government incentives and access to capital markets. In addition, the advanced banking facilities, a talent pool with rich industry experience, along with sophisticated IT and a fast and reliable underlying telecoms infrastructure, explain why so many banks have set up offices in the UK.

That doesn’t mean that the UK’s dominant position is guaranteed. At the moment financial services firms are waiting to see how the relationship between the UK and the EU pans out following Brexit. The current picture could easily change, especially if more financial businesses relocate from London to continue serving clients in the EU.

Regardless of these potential changes, the UK is likely to remain a key player in both FX and payments – at least for the foreseeable future.

18 RMB Tracker

About SWIFT and RMB currency analysis, as well as compare their 2. FX Portfolio Internationalisation: performance against the market. Since 2010, SWIFT has actively supported Global FX Market monthly trend analytics, its customers and the financial industry –– RMB Market Insights analysis report by Instrument Type/Currency Pair/Region/ regarding RMB internationalisation through provides fact-based quarterly market Segment with activity share within any of the various publications and reports. Through its analysis using unique data only available segments. This service provides valuable Business Intelligence Solutions team, SWIFT from SWIFT Business Intelligence macro-economic data based on real publishes key adoption statistics in the RMB transactional data. This service provides you Tracker, insights on the implications of RMB –– Similarly, the customised RMB analysis with a structured file giving high level market internationalisation, perspectives on RMB leverages SWIFT’s unique data and views combined with deep dive pivot table clearing and offshore clearing guidelines, provides crucial peer competition and views. as well as engaging with offshore clearing strategic insights to optimise your centres and the Chinese financial community business and support your decision 3. FX Transactional payments and FX to support the further internationalisation of making. opportunities the RMB. For further information about SWIFT’s Over 3 million MT 103 payment instructions SWIFT fully supports global RMB transactions Business Intelligence RMB Consulting are sent each day over SWIFT. This service through its global network and messaging Services and the full Business Intelligence provides a structured file that gives a global services, as well as RMB focused value portfolio, please visit swift.com or e-mail view of all banks payments where there was added services. SWIFT also has strategic [email protected] a potential ‘cross-currency’ opportunity, collaboration with CIPS, facilitating more together with an activity share. This service efficient RMB cross border payment provides valuable information on market transactions. SWIFT FX Data Services position and client (corporate) activity. These The FX market is one of the largest in the data can be used to identify the markets Please visit www.swift.com for more world but as a decentralised market it is very undeserved and to better target growth information about RMB Internationalisation or difficult to compile accurate amalgamated markets. join our new ‘Business Intelligence Transaction metrics. SWIFT has a unique dataset for Banking’ LinkedIn group. global FX Post Trade transactions where 90% For further information about SWIFT FX of the data is exclusive to SWIFT and not Performance Insights, please visit swift.com or available from any other source. As a result e-mail [email protected] Support your RMB strategy with fact- of our recent Design Partner project working based insights: closely with the top liquidity providers, we The growing importance of the RMB currency have made significant improvements to the and its role in financial markets is evident. data, and increased our understanding of the Because of this, financial institutions and FX business flows. All data for MT300s sent in corporates have already started to build 2018 and 2019 YTD has now been updated their RMB strategy or are planning to do so to include the Instrument Type confirmed in the near future but need more fact-based (using industry principles). We now have information to identify where their organisation available three FX Data Services: stands. 1. FX Performance Insights To support banks’ strategic development, SWIFT Business Intelligence provides insights Fact-based information on the foreign into the use of all currencies, including the exchange global market is very difficult RMB. In order to obtain more granular market to acquire. Most information is based on information on the internationalisation of the surveys and local data from an institution’s RMB as well as a competitive framework, own trades. The FX Performance Insights is SWIFT has developed three solutions: a unique reporting solution that shows your competitive position in relation to peers, and –– The Watch platform, a portfolio of online to the market. Enables your institution to make reporting and analytical tools that allows informed strategic decisions, based on actual banks to access unique analysis and transactions sent over the SWIFT rather than insights into their correspondent banking survey-based information. business through volume, value and

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