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Toronto reviews bid to become yuan currency trading hub

Section: Daily Dispatches

By Ari Altstedter
Bloomberg News
Friday, July 5, 2013

TORONTO -- Canada's banks are considering a plan to make Toronto the first North American trading hub for China's yuan, joining a global race for a share of trading in the currency of the world's second-largest economy.

Some of Canada's largest banks, insurance companies, and pension funds met with government representatives and the Bank of Canada in Toronto on June 21 to discuss establishing a yuan trading hub, according to the Toronto Financial Services Alliance, an industry group that set up the meeting. Representatives of Chinese banks also attended the meeting, the group said, declining to name them.

"There have been expressions of interest from some companies," said Janet Ecker, president of the finance group, who attended the meeting. "We've seen what's happened in London and Singapore and Hong Kong."

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The moves to set up a trading hub in Canada come as an organization representing Frankfurt's financial industry predicts the European Central Bank is nearing a deal with China that will help the German financial center become a European yuan trading hub.

The Bank of England signed a similar but smaller agreement last month, joining other recent additions like Australia, Turkey, Brazil, and South Korea as China pushes for greater use of its currency outside the mainland. To have a trading hub, a country's central bank must have an agreement with China's central bank to swap its currency for yuan.

"By moving early, if in fact it happens, the Canadian financial sector has an opportunity to punch above its weight in currency trading," said Finn Poschmann, an economist at the C.D. Howe Institute, a Toronto-based think-tank. "It's a terrific opportunity for that reason, given the scale of trade between North America and China, and the financial flows that necessarily follow."

The ECB may obtain an agreement with the People's Bank of China that would allow it to exchange euros for up to 800 billion yuan ($130 billion) which it could then lend to companies, according to Frankfurt Main Finance, a lobby group. Former Bank of England Governor Mervyn King signed a three-year swap agreement with his Chinese counterpart Zhou Xiaochuan last month that will make 200 billion yuan available.

The agreements provide companies with a safety net that aims to give them more confidence in doing business with their Chinese partners.

"The U.S. has a far more complicated relationship with China," said Adrian Miller, the head of fixed-income strategy at GMP Securities LLC, by phone from New York. "Canada has a natural resource bias, which plays into Canada's game plan as well. So it's an easier sell to go forward with that. That's why I think you're seeing it go there first instead of the U.S."

A representative of Ontario's Minister of Finance attended the meeting as an observer, Scott Blodgett, a spokesman, said in an e-mail. Canada's federal finance department does not comment on individual meetings, spokeswoman Stephanie Rubec said in an e-mail.

"At this point, our members are assessing the proposition, but we have no other information," said Maura Drew-Lytle, spokeswoman for the Canadian Bankers Association, which represents the country's banking industry.

The Bank of Canada doesn't comment on private meetings, Alexandre Deslongchamps, a spokesman, said in an e-mail.

Spokesmen for Canada's five-biggest banks, Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce, declined to comment.

Fabrice de Dongo, a spokesman HSBC Holding Plc.'s Canadian unit, did not immediately respond to a request for comment.

Canada's five largest banks, HSBC, Industrial and Commercial Bank of China, and the Bank of China attended the meeting, the Shanghai Daily reported June 27, citing an unidentified banking industry person aware of the matter.

Canada's trade deficit with China reached C$31.4 billion ($30 billion) in 2012, according to Statistics Canada. Prime Minister Stephen Harper has declared it a national priority to expand energy exports to Asia as it tries to reduce its alliance on U.S. markets.

Harper's government last year approved Cnooc Ltd.'s $15.1 billion takeover of Calgary-based energy producer Nexen Inc. At the same time, the government said it would approve further acquisitions of businesses in Canada's oil sands by government-backed companies only under "exceptional circumstances."

The TFSA's Ecker cites growing trade with China as one reason Toronto, and Canada, would make a good yuan hub, along with the country's large Chinese population.

There were 1.5 million people of Chinese ancestry in Canada as of 2011, or 4 percent of the population, according to Statistics Canada. Toronto is home to 40 percent of the country's Chinese population. By 2031 there will be 2.7 million people of Chinese origin in Canada, or 6.4 percent of the population, according to Statistics Canada projections from 2006.

"Interest has been expressed by people within the industry and we've seen other centers move into this space quite assertively," Ecker said in an interview. "We've certainly been told that some companies are saying, 'Oh, let's take a look.'"

China's Zhou pledged on June 28 to expand cross-border use of the yuan and encourage multinational companies to include the currency in their asset portfolios. China will allow direct trading between the yuan and foreign currencies and push forward on convertibility without giving up control of capital flows, Zhou said.

Switzerland is also seeking to be an offshore yuan-trading center, according to the Swiss Bankers Association, while Banque de France Governor Christian Noyer said in October that Paris has "all the conditions to become the renminbi offshore center of the euro zone." He was referring to another term for the Chinese currency.

"If you think China is going to be a dominant economy and there are going to be a lot of financial transactions in (yuan) you want the ability to trade it," said Nicholas Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics, by phone from Washington. "Everyone's thinking, the train's leaving the station, I better get on it. Even if it's not big right away, everyone thinks there's a first-mover advantage.”

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