China scores FX own goal by paving the way for HK firms to move to the West

The Chinese government and its absolute eye for detail and accuracy is revered by many and feared by some, especially when its involvement in global business transactions involves the harnessing of a huge and skilled Chinese workforce in unison with the massively well capitalized ruling power.

China’s expertise at entering global business on a vast scale via government-led project management is something that has very little competition, and its aspirations within the interbank FX market are no exception.

Despite being a completely closed communist country, China has managed to get the Yuan Renminbi out into Europe and the Antipodes, with clearing centers in Sydney and London, despite it having never being recognized as a reserve currency due to its strict capital controls and the way it is issued and held by a communist government.

This week, the European Central Bank (ECB) and the Peoples Bank of China (PBoC) have renewed their bilateral currency swap arrangement which under its current terms will stay in place until October 2022.

This is the second time the two central banks have agreed to a three-year extension of the accord, which was first set up in 2013. The conditions of the swap agreement are unchanged, with the maximum size of any swap set at 350 billion yuan (currently about $49.5 billion) and €45 billion (currently around $49.9 billion).

Whilst it is very likely that these arrangements were made and are continuing to be extended in order for corporates to settle their transactions with China when doing global business – after all, China does not allow any other type of currency than Yuan because FX transactions are handled by the government and conducted by government owned banks such as the PBoC, due to the capital control rulings that apply to every person and business in China – there is an effect that this may have on the retail and interbank FX trading sector.

Currently, China is at loggerheads with the citizens of Hong Kong, who, rather bizarrely, are attempting to riot and protest against the ever encroaching Chinese government stringency that is proposed in terms of Hong Kong’s legislature, which has been left as a relatively open special administrative region (SAR) since China took it back from its lease to Britain in 1997.

Quite what the public expected is a mystery, bearing in mind that in the 1990s, Hong Kong’s residents unanimously cheered and partied as the days of British democratic government and global enterprise drew to a close in order to hand over to communist China, a country that won’t even allow Hong Kong residents into the mainland without a strictly vetted visa!

The Chinese government had the opportunity to allow this ECB/PBoC clearing agreement to lapse and then close the door on Hong Kong when they finally win the power struggle however what has happened here is that a three year window of opportunity for FX transactions to be moved from tier 1 banks in Hong Kong to their London-based UK divisions of the same bank and then when the door closes, they’re already out of the Chinese jurisdiction and the PBoC and government will have to knock on the door of banks in London or Frankfurt in order to do global clearing deals which of course they will do because there is far too much traffic to ignore it.

HSBC, Standard Chartered, for example, are just two Hong Kong-based Tier 1 institutions that were formed during the British period, Standard Chartered being a South African institution which dates back to British colonial rule in the Cape Colony, and HSBC a British enterprise for conducting commercial business in Hong Kong during the time of Michael Kadoorie and the Peninsula Hotel along with wealthy Western merchants who rallied to operate in Hong Kong and British trade on the Bund in Shanghai.

Both banks conduct the vast majority of their business, and all of their FX dealing from London’s Canary Wharf, and the non-British banks from Europe such as BNP Paribas, Societe Generale and Deutsche Bank whose offices in Hong Kong lie in the shadow of Victoria Peak also conduct all their FX dealing from London.

Hence, it is likely that they will all now put in place a 3 year plan to safeguard themselves and their liquidity distribution from any future curtailing by the government, and in terms of Yuan business, will begin to operate it from London so that when the inevitable happens and Hong Kong gets its very own iron curtain, China will have no choice other than to open its channels for settlement in other currencies, or knock on the doors in Canada Square for Yuan clearing arrangements.

After all, LCH.Clearnet, EuroCCP, OCC, CME Group, SGX, and DTCC would easily conduct that bit of extra business and not only have the capacity to deal with it but are already in long term contracts with the major venues and banks so no changes would really need to be made.

Meanwhile, HKEx which is LCH.Clearnet’s Hong Kong competitor, is unlikely to be of favor, especially considering the tell-tale signs it has shown lately that it too is afraid of communist curtailment yet nobody wants to merge with it for probably the same reason.

The standoff between authorities and protesters has rocked parts of the region’s economy, which is home to some of the world’s biggest financial and business groups.

This is the ethos of fear, as it is clear that both HSBC and Standard Chartered would struggle tremendously to operate their current methods under communism.

Just two months ago, both banks’ retail operations in Hong Kong had been disrupted by the violent unrest that is occurring between public and government.

FinanceFeeds reported that HSBC had stated on its website that the HSBC Pacific Place Premier Centre and Pacific Place Day & Night Plus is closed from 12 noon on June 12, 2019 until further notice due to public events. HSBC customers who required to use HSBC’s banking services during the period at Admiralty were advised to visit the Hay Wah Building Branch and Premier Centre, or to use the Bank’s personal internet banking, mobile banking or phone banking.

At the same time Standard Chartered Hong Kong temporarily suspended branch operations in Admiralty until further notice due to traffic disruption. The aim is to ensure safety of staff and customers. The bank has suspended the operations of the two branches in Admiralty due to severe traffic disruption in the area. Banking services in Admiralty district, including branch services, cheque deposit service, ATMs and cash and deposit machines, were temporarily suspended until further notice.

This is not the first time that banks had done this. Both entities did the same during the last session of unrest four years ago.

HSBC, which stands for Hong Kong and Shanghai Banking Corporation, said in an advert this morning: “We are deeply concerned about recent events in Hong Kong. We strongly condemn violence of any kind and the disruption caused to the communities in which our customers, staff and shareholders live.”

The bank, which was founded in Hong Kong more than 150 years ago, said that maintaining the rule of law was “essential to Hong Kong’s unique status as an international financial centre”.

The HSBC advert was published in Chinese in five newspapers.

Standard Chartered also added its voice to the calls for peace, saying in three newspaper adverts: “We strongly support ‘one country, two systems’, and support the SAR [Special Administrative Region] government in effectively maintaining social stability and safety.”

The messages were echoed by Hong Kong-based Bank of East Asia (BEA), which posted a 75 per cent drop in profits yesterday after writing down property loans in China.