Switzerland – A New Hub for the Chinese Renminbi?
Switzerland has recently taken a number of key measures to become a hub for the Chinese currency. This better aligns the Swiss financial sector with the longer-term trends in China, a market with a massive potential.
Switzerland is well on its way to becoming a hub for the Chinese currency – the renminbi. This matters greatly, as China and Switzerland have close trade relationships. Further export stimuli can be expected as a result of a free trade agreement signed last summer. This positions Switzerland and its entire financial sector well toward China.
Chinese Economy Remains Dynamic Despite Slowdown
The Chinese economy has recently slowed, but continues to expand at a much faster pace than most of the rest of the world. Mainland China is strengthening its position as the world’s second-largest economy – a ranking achieved on the back of annual growth rates of above 10 percent over the past two decades. The emerging superpower's recent slowdown "arguably owes in part to actions undertaken to increase the country's financial stability, but those measures in turn should make China's economic growth more sustainable," said the bank's Head of Economic Research, Oliver Adler.
Dynamic Swiss-Chinese Trade Flows
The trade relationship between Switzerland and China is strong and provides substantial benefits to both partners. For every 1 percent increase in China’s economic output, its demand for Swiss goods increases by 3.4 percent – a much higher figure than for other trading partners such as the Eurozone (2.7 percent) and the US (2.2 percent). The main reason is that demand for high-quality Swiss products such as pharmaceuticals, machinery and watches increases disproportionately as China’s prosperity rises. Another important factor typically influencing trade flows – the exchange rate elasticity – is very low. This means that the sensitivity of demand to changes in the exchange rate is nearly inexistent. "Overall Chinese demand for Swiss products is thus unlikely to suffer too much a result of the strong Swiss franc” Adler underlined. Last year, nearly 8 percent of Swiss exports, or 16 billion Swiss francs, headed for the Chinese market. Mainland China primarily imports pharmaceuticals and machinery, while Hong Kong mainly imports watches and jewelry. "Over the last 10 years, China's contribution to Switzerland’s export growth has been almost as large as the US contribution and only slightly smaller than that of the UK," he added.
Signed Trade Agreement to Boost Swiss Exports Further
The free trade agreement between Switzerland and China that went into effect just over a year ago, in July 2014, should further intensify the trade relationship between the two countries. Switzerland is actually the first European country to have signed such a comprehensive trade agreement with China. "Neither the European Union nor the US can count on even remotely similar trade facilitations," stressed Adler. Switzerland Global Enterprise, the government's trade and investment agency, estimates that Swiss companies exporting to China could make cumulative savings on customs duties reaching approximately 5.8 billion Swiss francs during the period 2014-2028 – a significant competitive advantage. Switzerland is one of few countries in the world that currently runs a trade surplus with China/Hong Kong: it exports more than it imports from China/Hong Kong.
Internationalization of the Renminbi Triggers Hubs Abroad
As the Chinese economy continues to expand, so will the assets that need to be managed. "The increasing internationalization of the renminbi creates business opportunities for international offshore renminbi hubs, including Switzerland," underlined Christine Schmid, Credit Suisse's Head Global Equity and Credit Research. "Renminbi hubs are platforms for international transactions in the Chinese currency, but they also serve as springboard for further developing renminbi-denominated financial services that go beyond mere transaction operations," she explained. Switzerland is well placed to become such a hub, as it has recently fulfilled key underlying conditions: In July 2014, the two countries' central banks struck a bilateral currency swap line agreement that enables their respective currencies to be bought and sold between their central banks up to a maximum limit of 150 billion renminbi (21 billion Swiss francs). In January, a declaration of intent to establish clearing arrangements for renminbi trading in Switzerland was signed, and the Chinese central bank announced it would extend its existing Renminbi Qualified Foreign Institutional Investor (RQFII) pilot program to Switzerland. Four months later, the state-owned China Construction Bank (CCB), which ranks among the country's four largest banks, applied for a Swiss banking license in order to handle its renminbi business from Zurich. Other Chinese banks may soon follow suit. Chinese state-owned banks have over the past couple of years been expanding overseas, notably to facilitate the internationalization of the renminbi.
Numerous Positive Consequences for Switzerland
The bilateral currency swap line deal as well as the approval of the CCB’s bank license by the Swiss regulator FINMA provides Switzerland with the essential requirements to become a European hub for the renminbi. “This will benefit both Switzerland as an economic and financial center in a number of respects as well as Chinese clients,” Schmid said. Chinese clients will have access to traditional transaction services, but also to renminbi-denominated services such as trade finance, exchange-traded money market funds or capital market operations. Corresponding asset, wealth and risk management services will also be provided. Credit Suisse therefore welcomes and endorses the continuing dialogue between the two governments and their cooperation on issues concerning the entire financial industry. “This positions Switzerland’s entire financial sector as an international financial services center with a long-term alignment toward the Chinese market. It marks a successful and pragmatic further development of trade relations between the two countries,” she stressed.