Yuan Clearing China Makes Frankfurt Unnecessary

The Chinese government has decided to open its currency market more quickly than expected, robbing Germany’s financial capital Frankfurt of its special status for yuan trading.
Chinese banks who have come to Frankfurt to create a foreign market for yuan currency trading are angry with German regulators for demanding they set aside high capital reserves.

Frankfurt reveled in news last year that it would become the first trading center for the yuan outside of China. But now it appears as if Beijing has already made the German financial capital irrelevant.

The Chinese authorities have announced that by the end of the year a new platform for clearing yuan trading called the China International Payment System, or Cips, will be set up in Shanghai. “Cips is an important step towards internationalizing the yuan,” said Yi Gang, deputy chairman of the country’s central bank, recently.

But by liberalizing its currency market, China will make special overseas clearing houses like Frankfurt superfluous.

Over the past five years, China has set up several isolated yuan trading centers with the aim of easing foreign trade but still controlling capital flows. Frankfurt is one of those currency clearing outposts.

Mr. Yi emphasized that Cips would “not replace any existing facility, but rather would complement current mechanisms.” That means the ability to do yuan trading in Frankfurt would remain intact.

“There will be several clearing channels,” said Christian Westerhaus, director of Deutsche Bank’s cash management unit.

In theory, business could be handled by either a German or Chinese partner bank working with Cips. Mr. Yi said the platform will start with 19 financial institutions.

In China, one reform is often followed by the next.

However, dreams of establishing Frankfurt as a leading center for yuan dealings will likely be dashed with the latest developments. In China, one reform is often followed by the next.

Just last week, central bank chairman Zhou Xiaochuan announced: “We hope to achieve a largely open capital market in 2015.” It now appears as if Cips will play a key role in this liberalization.

“Zhou’s words show that the speed of reforms to the financial markets is much greater than the expectations of market players,” said Qu Hongbin, an economist for HSBC.

Making Frankfurt a yuan trading center was little more than a gesture of support for Germany’s financial center. The major yuan clearing was always done in Hong Kong, where many European banks handle currency trading for their clients.

But Deutsche Bank’s Mr. Westerhaus said it has still been a useful exercise being a pioneer of yuan deals. He said the experience would help the Chinese business of Germany’s important small- and mid-sized companies known as the Mittelstand, as well as smaller German banks without direct access to yuan clearing in China.

Deutsche Bank would continue to support the yuan activities in Frankfurt, according to Mr. Westerhaus. Other banks said they had similar intentions.

But until now, there has actually been precious little yuan dealings in Frankfurt. Some 50 financial institutions have registered at the center, according to Bernd Meist of the Bank of China, which organizes the currency clearing. “We’re content with that number,” he said. “What’s critical at the moment is the volume. The start of the clearing bank was the first step, now there needs to be more volume – but that’s not solely our job.”

What Mr. Meist means is that it will take time to establish the center. But the Chinese government just reset the clock, assuming it keeps introducing reforms at a breakneck pace.

 

Finn Mayer-Kuckuk is Handelsblatt’s Beijing correspondent and Elisabeth Atzler is a correspondent in Frankfurt. To contact them: [email protected] and [email protected]