China has, for the first time, granted a European bank the authority to directly clear and settle yuan transactions. China's push to increase the use of the yuan in international trade and investment and reduce reliance on the dollar-centered global financial system is expanding into Europe.
On the 11th, according to the Financial Times (FT), the People's Bank of China, China's Central Bank, designated Germany's Deutsche Bank as the yuan clearing bank in Frankfurt. A clearing bank reconciles amounts that banks exchange during cross-border transactions and connects them so that actual fund settlement takes place.
This is the first time in Europe that a non-Chinese bank has been authorized to clear and settle yuan transactions. Overseas yuan clearing operations have so far been led by China's state-owned banks. The four major state-owned banks—Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), Bank of Communications (BOCOM), and China Construction Bank (CCB)—mainly handle yuan clearing through their branches around the world.
Deutsche Bank had built a long-standing relationship with China's financial market before this designation. It opened its first overseas office in Shanghai in 1872 and, in 2015, joined the Cross-Border Interbank Payment System (CIPS) that China established as a direct participant bank.
With this designation, Deutsche Bank can now directly clear and settle yuan transactions for European corporations and financial institutions. Leo Yin, head of Deutsche Bank China, said, "A direct bridge to China's financial system has been established," adding, "Our ability to support clients participating in trade and investment between Europe and China will be strengthened."
Deutsche Bank expects European corporations and financial institutions using yuan clearing services to reduce expense and inconvenience arising from currency exchange and to streamline supply chain-related payments. Chinese corporations are also expected to use it to raise European investment funds within the yuan financial system and to facilitate trade transactions.
China has recently accelerated policies to increase yuan use in international trade and investment. The aim is to reduce dependence on the dollar-led global financial system and expand the yuan's international influence. In fact, the 15th five-year plan that the Chinese Communist Party released this year also includes expanding the role of the yuan in trade, investment, and finance. FT noted that the unpredictability of U.S. President Donald Trump's trade policy has added urgency to China's yuan internationalization push.
In particular, more global corporations and financial institutions have recently been tapping China's low interest rates to raise funds in yuan. U.S. investment bank Goldman Sachs and insurer Chubb, as well as Singapore's sovereign wealth funds Temasek, have expanded issuance of yuan-denominated bonds, or "dim sum bonds," in Hong Kong. Deutsche Bank this year issued bonds twice in the onshore "panda bond" market, where foreign institutions issue in yuan. On Mar. 3, 5.5 billion yuan (about 1.15 trillion won), and on Jun. 35 billion yuan (about 733 billion won).
However, observers say the yuan still has a long way to go before it can practically replace the dollar as an international currency. While China has made some progress in expanding yuan use in trade settlement and offshore lending, the yuan's share of global foreign exchange reserves remains low.
Meanwhile, China is further opening its domestic bond market to foreign investors, but global bond investors are not significantly increasing their purchases of Chinese Government Bonds. FT said relatively low yields, China's economic slowdown, and a rising debt-to-GDP ratio are cited as factors hindering a greater shift into Chinese Government Bonds.