Canada has been designated a trading hub for China's currency. What does it mean in terms of jobs, the economy and international trade?
Canada has been designated a trading hub for China’s currency, a move aimed at boosting international business between the two countries while also nudging China’s once cloistered “redback” toward global status.
Among other things, it means for the first time, Canadians can open bank accounts in Canada that contain China’s yuan, also known as the renminbi (RMB).
Canadian institutional investors, such as pension funds, will also be able to buy up to 50 billion yuan worth of Chinese bonds and stocks directly. That’s roughly $9.2 billion.
The deal will “continue to boost the Toronto region’s status as a global financial centre,” Janet Ecker, president and chief executive officer of the Toronto Financial Services Alliance, said in a statement.
But the main reason Canada sought the deal was to encourage Canadian business to trade more with China, the world’s fastest-growing and second-largest economy.
“What this is, hopefully, is a wakeup call to Canadian business to do more trade with China,” said Jason Henderson, head of global banking for HSBC Canada. Instead of being 21st on China’s list of trading partners, he said, Canada should be closer to 10th or 12th based on the relative size of the economy.
Both Harper and central bank governor Stephen Poloz have urged Canadian business to expand their international trade efforts, both to reduce Canada’s dependence on the U.S. economy and also offset sluggish domestic demand. How fast and how much of that actually happens will depend on how good a job the banks do of selling the idea to Canadians.
“Our next step is to get out and explain this to our customers,” Henderson said.
The Canadian Chamber of Commerce has estimated the hub could boost Canada’s exports to China by as much as $32 billion over the next decade. Most of it will happen in commodities, such as wood, oil and minerals. Canada’s current two-way trade with China is $73 billion a year.
The deal could also cut Canadian importers’ costs by as much as $2.75 billion, the chamber also estimated last month, saying those savings could “potentially” be passed onto
consumers in the form of lower prices, mainly on consumer goods.
Currently, Canadian companies buying and selling in China have to convert the funds used to finance those deals into an intermediary – usually U.S. dollars – an extra step that adds costs.
More than half of Chinese businesses would offer Canadian importers discounts of up to 5 per cent if Canada’s banks could convert Canadian dollars directly into Chinese yuan, a survey by HSBC bank found.
Some of the details of the RMB trading hub agreement, announced Saturday in Beijing by Prime Minister Stephen Harper and Premier Li Keqiang, have yet to be worked out, such as where the hub will be located.
Toronto and Vancouver had been rivals for the designation, which has previously been assigned to a city, not a country. Other cities, such as London, Frankfurt and Seoul, already have it, while Paris and Luxembourg are in the queue.
For now, the designation is Canada.
A hub is mainly a virtual concept. It doesn’t create a new building or a new organization. Rather, it means China’s central bank — the People’s Bank of China — has authorized a centre to complete RMB transactions.
“The goal here in Canada, from my perspective, is we want a Canadian company anywhere in Canada to be able to walk into their local bank of choice and say, ‘I need this RMB product.’ Whether it’s in Vancouver, Calgary, Toronto, Montréal or Ottawa shouldn’t make a difference,” C.J. Gavsie, global head of foreign exchange products for BMO Capital Markets, said in an interview.
China named ICBC, the Industrial and Commercial Bank of China, in Toronto, as the clearing house for the currency transactions.
The deal is backed by a three-year, $30 billion currency swap agreement with the Bank of Canada, which means the central bank would step in to backstop any deals if credit dried up during a crisis.
For China, creating trading hubs is a controlled way to “liberalize” its currency, which could one day rival the U.S. dollar as the currency of choice for international deals.
Canada is the first place in the Americas to win the designation, giving Canadian companies a competitive edge over their U.S. rivals.