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As reported today by the Financial Times, The People's Bank of China (PBOC) China's central bank, has authorised Deutsche Bank to clear and settle renminbi transactions in Frankfurt, the first time a European bank has been given the role.
The PBOC confirmed the designation yesterday. The PBOC said the decision was made in accordance with a memorandum of understanding between the central bank and Deutsche Bank.
Most offshore renminbi clearing houses are run by the local branches of China's four largest state-owned lenders, namely Bank of China, Industrial and Commercial Bank of China, Bank of Communications and China Construction Bank. Deutsche Bank is the first non-Chinese institution in Europe to be given clearing and settlement permissions.
What the designation allows
The appointment gives European banks, brokers and corporates a direct route into China's onshore payment infrastructure rather than a path routed through offshore centres. Deutsche Bank said it will provide direct end-to-end processing, clearing and settlement for cross-border renminbi transactions for European financial institutions and businesses, acting as a local bridge to China's payment systems.
The bank said the move gives European businesses and financial institutions direct access to China's onshore financial system, including capital markets and liquidity infrastructure.
Speaking to the Financial Times, the head of the bank's China business sees the appointment as a remnimbi clearer as an infrastructure link rather than a product launch.
"This establishes a direct bridge into China's financial system" - Leo Yin, President, Deutsche Bank China
Yin told the FT he expects European corporates to use the clearing capability to cut currency friction and simplify supply chain payments, while Chinese firms are likely to use it to fund European investment and settle trade flows without leaving the renminbi ecosystem.
"It strengthens China-Europe financial connectivity," said Alexander von zur Muehlen, Management Board member at Deutsche Bank, in comments reported by Reuters.
Frankfurt already had a clearing bank
The designation adds to existing capacity, where Bank of China's Frankfurt branch has held renminbi clearing bank status since June 2014, when it became the first such arrangement in the euro area. (The PBOC did not publish transaction volume targets or operational timelines alongside the announcement.)
Deutsche Bank has been building renminbi capability for more than a decade. It joined the Cross-Border Interbank Payment System, China's alternative to Swift, as a direct participant in 2015. The bank is also the top ranked non-Chinese institution for panda bond deals this year, according to Bloomberg data cited by the FT. Panda bonds are renminbi denominated instruments issued in mainland China by foreign institutions.
Part of a wider internationalisation push
Beijing has accelerated its efforts to widen global use of the renminbi and reduce dependence on dollar dominated payment rails. The Communist Party's 15th five-year plan, released this year, called for a larger role for the currency in trade, investment and financing. China's central bank pledged in the plan to keep the yuan exchange rate broadly stable and to expand use of the currency in international trade and investment.
China introduced fresh measures in June to encourage global adoption of the yuan, and shortly afterwards designated Standard Bank and Industrial and Commercial Bank of China as the Renminbi Clearing Bank of Africa, covering 19 African countries.
Borrowing in the currency has also picked up as Chinese interest rates sit at historic lows. The FT reports that Goldman Sachs, insurer Chubb and Singapore state investor Temasek have all increased issuance of dim sum bonds, the renminbi debt issued in Hong Kong.
Reserve currency share still lags
Progress in trade settlement and offshore lending has not translated into reserve status. The renminbi's share of global reserves remains low, and global fixed income managers have been slow to raise allocations to Chinese sovereign debt despite Beijing opening its bond markets further to foreign investors. Investors point to relatively low yields, slowing growth and a rising debt to GDP ratio as reasons for holding back, according to the FT.
For payments firms, treasury desks and FX brokers with China facing flows, the practical question is whether a second Frankfurt clearing route shortens settlement chains and reduces correspondent banking costs in a measurable way, or whether it simply adds an alternative to an existing one.
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