New Canadian RMB financial hub cuts out U.S. dollar

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      Canada’s resource-dependent economy is undergoing a major stress test. The global oil-price collapse has diminished prospects for proposed oil-pipeline and liquefied-natural-gas projects worth hundreds of billions of dollars. There’s prolonged weakness in the manufacturing sector as well as the rising cost of a long-term military commitment in the Middle East.

      With a federal election due later this year, doubts are emerging that Prime Minister Stephen Harper will be able to meet his government’s promise to deliver balanced budgets this and next year. In a panic over the slowing Canadian economy, the Bank of Canada made a surprise 0.25-percent cut to the prime rate in January that blew away an unsuspecting Bloomberg panel of 22 leading economists.

      With the U.S. now a major competing energy producer—and President Barack Obama’s blunt rejection of the Ottawa-backed Keystone XL pipeline for Alberta to export 830,000 barrels of oil per day—the still-vibrant economies of Asia’s more than four billion people are being talked up as the last escape route for a besieged Canada.

      Except that Canada’s political and opinion leaders remain conflicted over closer ties with China while Canadians generally continue to snub learning “Asia competence” skills to tap the region’s hungry markets, according to the Asia Pacific Foundation of Canada (APFC).

      “China will be an important issue in the federal elections,” Earl Drake, a former Canadian ambassador to China, said in a March phone interview with the Georgia Straight. “While we’re interested to expand trade ties, the Canadian government and many Canadians have concerns about China’s human-rights record and are wary of potential Chinese security threats.”

      Drake cited what he called widely held Canadian fears that Chinese firms could use trade and investment to expand Beijing’s political influence in Canada as well as to conduct espionage and theft of intellectual property. These concerns almost led Ottawa to block China National Offshore Oil Corporation’s (CNOOC) record $15.1-billion purchase of Calgary-based Nexen Inc. in 2012.

      By early 2014, though, the Chinese state-owned firm was hurting for having paid a very generous 61-percent premium to acquire a company with few growth prospects. In the past year, Nexen has laid off staff and fired senior executives, while the Chinese government is stepping up its crackdown on corruption in the country’s oil-and-gas sector.

      Drake acknowledges that energy and mining companies today are more worried about the Chinese not showing up amid the oil-and-gas price rout and the liquidity squeeze on resource projects. Following the bitter experience with CNOOC’s Nexen buyout and various ensuing political issues, Beijing itself has taken a more cautious approach to ties with Ottawa while cooling off support for large investments in Canada.

      The puck has now been passed to both countries’ business communities, which are less politically constrained as they step up play for expanded bilateral trade. At a ceremony in Toronto on March 23, Finance Minister Joe Oliver launched Canada as the Americas’ first hub to clear trades in goods and services using the Chinese yuan, or renminbi (RMB), without having to first convert to U.S. dollars.

      Companies can expect to save about five percent on direct RMB transactions by eliminating costs associated with the U.S. dollar conversions, said Gao Min, a Toronto-based treasury vice president at the Industrial and Commercial Bank of China (ICBC), in an interview in Vancouver. Although ICBC is little known to most Canadians, it is the world’s largest bank, with more than US$3 trillion in assets. It was appointed by China’s central bank to clear RMB transactions for North America after Prime Minister Harper announced a set of bilateral trade agreements in Beijing last November.

      China will also open up its capital markets for Canadians to invest up to RMB50 billion as part of a bigger goal to promote the international use of the Chinese currency and its eventual rise as a global reserve currency.

      The Canadian hub, which will be served by a network of major local and international banks through a computerized platform, will be the 10th one jointly established by China around the world since Hong Kong launched the first one in 2011. The others are located in Singapore, London, Frankfurt, Sydney, New Zealand, Luxembourg, Seoul, and Taipei.

      “The internationalization of the RMB is one of the most significant financial events of the 21st century, and the Canadian economy will benefit from Canada’s position as the first RMB trade and investment hub in the Americas,” said Ananth Krishnan, the Vancouver-based head of HSBC Bank’s global trade finance for the western region, in an interview after delivering his RMB presentation at a packed AdvantageBC forum in Vancouver on February 20. AdvantageBC is a Vancouver-based group representing about 150 financial and business organizations tasked primarily with promoting B.C. as an international business centre.

      The hub will enable companies to save hundreds of millions of dollars a year in conversion costs alone, Ananth told the Straight, as China is Canada’s second-largest trading partner, with combined imports and exports exceeding a record $56 billion last year, according to Statistics Canada.

      The hub will also open up possibilities for Canadian firms to develop new trade ties with China, because the RMB facility will enhance their attraction in the eyes of Chinese buyers and suppliers, said Ananth, who predicts that during the next three years, Canada’s exports to China will grow by 11 percent annually while imports will rise by eight percent per year.

      “The Chinese government is introducing baby steps to further open up its economy and the RMB as an international currency. They’re establishing settlement hubs around the world to encourage its use. In four to five years, it’ll be fully convertible like other major currencies,” he said during his talk.

      Colin Hansen, a former B.C. finance minister who heads up AdvantageBC, said the RMB has enormous potential to grow as an international currency because it was used to settle only 2.17 percent of global payments last November, up from 0.63 percent in early 2013. It recently overtook the Canadian and Australian dollars—and will soon surpass the yen—as the world’s fourth-most-popular payment currency, behind the pound sterling, the euro, and the U.S. dollar. The RMB has already displaced the pound and euro to become the second most widely used trade currency after the dollar.

      Former B.C. finance minister Colin Hansen believes the RMB has potential to grow as an international currency.

      Hansen’s optimism about the RMB’s continued rise is backed by the World Bank’s projection that China will soon overtake the U.S. as the planet’s largest economy to add to its 2013 title as the number one global trading nation.

      Speaking at the February 20 forum attended by about 80 business executives, Hansen said he plans on selling Vancouver, and Canada in general, as the location to provide RMB services to companies in the Americas that have or are planning to have trade and investment ties in China.

      “This hub service represents a huge new business opportunity for Canada,” he said in his talk, painting a vision of Vancouver attracting and launching new financial businesses based on the RMB trade and China-related services. Companies in the region should choose Canada over Hong Kong and other faraway centres offering the currency services, he said.

      A Canadian Chamber of Commerce report issued last October said: “The RMB hub would give Canadian financial institutions an important advantage in being able to offer a complete suite of RMB services to customers throughout the U.S. and Latin America.”

      China’s already booming trade with Latin America received a long-term boost from Chinese president Xi Jinping’s announcement in January that Beijing plans to invest US$250 billion in the area in the next decade. For Canada alone, the chamber said, the RMB trading hub will generate an additional $21 billion to $32 billion worth of exports, and potential discounts on imports totalling $2.8 billion, during the next 10 years.

      As with most projects involving China in Canada, there are as many opponents and doubters as supporters. Canada’s reluctance to conclude drawn-out talks for a free-trade agreement (FTA) with China will slow down the hub’s takeoff, according to three analysts.

      Grégoire-François Legault, a fellow at UBC’s Institute of Asian Research (IAR), wrote in a March 4 memo published on the IAR website that “the absence of an FTA reduces the benefits of a currency hub and puts Canadian exporters at a serious disadvantage” against competitors like Australia and New Zealand, which both have concluded such agreements with China.

      Establishing the hub “was the easy task”, he wrote, but the touted benefits will only be realized if there is an FTA to enable freer and faster movements of goods between the two countries, backed by legal protections. Although at record levels and still growing, Canada-China trade still forms a small portion of each country’s total trade with the world.

      But trade deals with China are so unpopular with segments of Canadian voters that none of the country’s political parties will campaign on a platform that includes working toward an FTA with Beijing, said Yuen Pau Woo, a former president of the Asia Pacific Foundation of Canada.

      “An FTA will benefit Canadian exporters more than it will benefit Chinese exporters,” he said in a phone interview. “The reason is that an FTA will offer more protection in China, including both border and behind-the-border barriers to trade. But China will also benefit since they will have better access to high-quality Canadian goods and services, which will, in turn, spur reforms in the Chinese economy.”

      In view of Ottawa’s caution, Hendrik Brakel, the Canadian Chamber of Commerce’s senior director for economic, financial, and tax policy, believes it might take years for the two countries to conclude an FTA.

      For all his optimism, AdvantageBC’s Hansen concedes that the RMB hub may need time to take off, because Canadians are used to trading in the greenback.

      “It will take time for Canadian executives to move out of their comfort zone to use the RMB,” he said. “We have a generation of Canadians who have lived in a world where the U.S. dollar has long been dominant.”

      Further putting the brakes on closer Sino-Canadian ties was Ottawa’s decision to side with the U.S. and Japan in not signing up for the China-led Asian Infrastructure Investment Bank (AIIB). When the deadline passed on March 31, at least 46 countries, including the U.K., Germany, France, Italy, and Australia, had joined or applied for membership in the bank launched by China and several other Asian nations last year to help finance the region’s infrastructure development, estimated to cost at least US$8 trillion between 2010 and 2020.

      Canada and Japan were the only two major economies to yield to U.S. pressure to decline China’s invitation, as the AIIB is seen as a rival to existing global financial institutions like the World Bank and the International Monetary Fund.

      In an interview at UBC, Timothy Cheek, director at the IAR’s Centre for Chinese Research, told the Straight that the Harper government has not closed the door yet on Canada becoming an AIIB member, but its decision to stay out will further reduce Ottawa’s already declining influence in the Pacific community.

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      3 Comments

      Canuck True North

      Apr 8, 2015 at 2:31pm

      The China Trade Deal has given sovereignty of Canada's natural resources to Communist China.

      Under Cash Envelope Brian the NAFTA has made Canada the most sued nation under that Trade Deal.

      Yes you and I regardless of Political Party or Affiliation pay those Billions coming due under NAFTA Fines with 20+ Law Suits and growing.

      Meanwhile Norway sits atop a Trillion Dollar surplus while Canada and it's Provinces have a structural Deficit regardless of the current Accounts surplus in Victoria or Ottawa.

      I guess the Norwegians are smart and we are stupid.
      There won't be much of Canada's natural resources left over the next 20 years or so.

      Jeffrey

      Apr 8, 2015 at 6:01pm

      Put it out on the east coast. With a Northern and a Western branch.

      Linda

      Apr 10, 2015 at 12:40am

      The writing is on the wall for the us dollar.
      We are in for some major changes coming and it's typical that the main media is not letting people know, what's really going on.