Other offshore centers may replicate Singapore's yuan liquidity facility program

With the expected benefits from the Chinese yuan liquidity facility that the Monetary Authority of Singapore (MAS), Singapore's central bank, opened late last month, analysts here have predicted that other offshore centers with small local yuan liquidity pool would follow suit.

In efforts to boost yuan's cross-border trade settlement locally, the MAS initiated trade financing liquidity support in its yuan liquidity facility by providing a standardized three- month yuan facility at the three-month Shanghai Inter-bank Offered Rate.

During the process, the MAS will activate its swap line with the People's Bank of China (PBoC) to gain access to onshore yuan funding. The funding is then on-lent to local banks, and to customers for trade-related activities.

The facility is of three-month renewable tenor. Upon maturity, the local bank returns the yuan funding and interest payment to the MAS, which then returns it to the PBoC.

The MAS' initiative was made in light of Singapore's small local yuan liquidity pool and increasing demand for yuan from local businesses.

This came after the central bank of the city-state had entered enhanced bilateral currency swap arrangement with PBoC in March 2013 with the size of the swap arrangement doubled to 300 billion Chinese yuan.

Since the conclusion of the arrangement, the yuan is gaining traction with Singapore companies, as shown in the growing size and number of yuan accounts opened with local banks.

For instance, United Overseas Bank, the third largest local bank, said there were 80 percent more yuan accounts opened from April to July as compared with the first quarter of the year. The volume of payments in yuan has also increased by more than 30 percent in the same period.

Standard Chartered Global Research (SCGR) believed the MAS program will provide a strong boost to trade financing by using China's onshore liquidity to offer yuan liquidity to banks engaging in yuan trade settlement.

Indeed, trade financing has been the leading driver of offshore yuan lending activity among the current offshore yuan users, according to a recent SCGR survey.

"The MAS model may be replicated by many others that have signed bilateral swap agreements with China as it can help to meet yuan funding demand arising from cross-border trade settlement activity, even before the local yuan liquidity pool reaches critical mass," the SCGR said.

For new offshore centers without significant local yuan liquidity pools, the best way to expand offshore yuan business is to establish ways to better utilize the swap lines provided by PBoC in bilateral swap agreements to support offshore funding demand.

Replicating the MAS model should help other central banks to bring more offshore yuan corporate users on board. Another advantage, the SCGR said, is that the availability of locally based offshore yuan clearing banks will not be a firm prerequisite for such liquidity facilities.

The PBOC has signed 21 bilateral swap agreements worth 2.2 trillion Chinese yuan. Such facilities are aimed at promoting cross-border yuan settlement, but are still thinly utilized as to date. Only Hong Kong, Singapore, and the Republic of Korea have publicly announced the utilization of their bilateral swap lines so far. (1 U.S. dollar equals to 6.127 Chinese Yuan)