After hype, Toronto’s yuan clearing hub sees slow start

Three years after it opened amid much fanfare with the promise of paving the way to more trade between Canada and China, the yuan hub in Toronto has proven to be a bit of a dud.

Even as Prime Minister Justin Trudeau makes overtures to launch free trade talks with the world’s second-largest economy, Canadian firms have been slow to warm to the hub, which allows them to settle transactions in the Chinese currency with Chinese business partners.

“We expected a higher jump from the start point and it hasn’t happened,” said Min Gao, head of the treasury department at the Canadian unit of Industrial and Commercial Bank of China, which runs the hub’s clearing house. “But it’s still growing, and it’s healthy growth.”

The benefits of the hub, the first of its kind in North America when it opened in 2014, are obvious. Settling transactions in the yuan gives Canadian companies broader access to suppliers and customers in China, where many smaller firms only use yuan. It also helps firms in both countries avoid costly and time-consuming U.S. dollar intermediaries.

Yuan flows between China and Canada are up 67 percent since the hub was established, and the currency now accounts for 15 percent of all flows between the two countries, compared with a 70 percent share for the Canadian dollar, the Society for Worldwide Interbank Financial Telecommunication, a global payments network, reported in October.

Still, just 7 percent of Canadian companies use the Chinese currency, compared with a global average of 24 percent, according to a separate 2016 study by HSBC Bank Canada.

China has been boosting efforts to open its financial markets following the yuan’s addition to the International Monetary Fund reserve currency basket. While the U.S. dollar is still the global currency of choice, the use of the Chinese currency has been on the rise.

China’s financial markets have already opened for some Canadian players. Bank of Montreal and HSBC’s Canadian units were authorized by the People’s Bank of China in November 2016 to become market makers for direct trading of yuan against Canadian dollars in China’s inter-bank foreign exchange market.

National Bank of Canada also issued its first panda bond, or yuan-denominated debt issued in China, in October 2016, and followed that up with another in September. MDT/Bloomberg