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04 Nov 2013

Frankfurt makes its mark with RMB

Carola von Schmettow

by Carola von Schmettow

Head of Markets and Capital Financing, HSBC Trinkaus & Burkhardt AG

Frankfurt makes its mark with RMB (Getty Images/Sven Hagolani)

Frankfurt is attempting to become a major European offshore RMB trading hub

In recent years, Germany has capitalised on China’s growth as an industrial power. Frankfurt, the country’s leading financial centre, is now poised to benefit as China’s currency increases in importance.

Germany has a long and successful trade relationship with China. German companies were among the first to build subsidiaries and plants in China in the 1980s. Frequent trips made by German leaders to China also helped to strengthen political relations.

Businesses were quick to realise the potential of establishing bases outside the main centres of Beijing and Shanghai. Today, not only global players but also hundreds of small and medium-sized firms have set up factories in cities such as Taicang and Qingdao.

German efforts to build productive relationships with the world’s second-largest economy have started to pay off. According to HSBC Global Research, exports to China were equivalent to 2.5 per cent of German GDP in 2012 – significantly higher than the comparable figure for France (0.7 per cent) or the UK (0.7 per cent).

Germany has a long and successful trade relationship with China. German companies were among the first to build subsidiaries and plants in China in the 1980s

China’s continued growth is creating new opportunities. For many years the Chinese currency, the renminbi (RMB), could be used only inside the country. The currency is now establishing its presence in global markets. According to figures published by the People’s Bank of China (PBOC), 16 per cent of China’s foreign trade is currently settled in RMB.

But there is potential for much more. The RMB is the world’s eighth most-traded currency, but HSBC Global Research suggests it could rise to third place by 2015. Australia, Turkey, the UK and the eurozone have all made currency swap deals with the PBOC to help establish RMB offshore centres in their respective countries.

Today, Frankfurt is attempting to become a major European offshore RMB trading hub. It is well positioned to do so as the biggest financial centre on the continent and home to the European Central Bank (ECB). Frankfurt, as an RMB trading centre in Europe, would benefit from Germany’s close economic ties with China. The time difference between Hong Kong and New York means that a European centre offers a natural bridge for trading, similar to London. An RMB event in July sponsored by HSBC, Internationalising the Renminbi – Opportunities for Frankfurt, attracted 300 delegates from around the world.

In October, the ECB and the PBOC agreed an RMB350 billion bilateral currency swap arrangement – the PBOC’s third-biggest swap facility. The deal will further encourage bilateral trade and investments between the eurozone and China.

Establishing an RMB clearing bank in Germany to speed up the settlement of cash business would help to boost Frankfurt’s ambitions, even more so after the UK and China agreed on an RMB80 billion investment quota in October. The move allows for investment in China’s domestic securities under the Renminbi Qualified Foreign Institutional Investor program.

Frankfurt’s bid is similar to attempts in London, Zurich and Paris to establish offshore trading centres. Those who succeed will be well placed to benefit from the next chapter in China’s growth.

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