China is like a game of endurance for foreign banks. How far will each one go to become the preferred foreign lender? Standard Chartered has raised the stakes by launching its own UK clearing system for the Chinese currency. It's a step forward for China; less obviously so for StanChart's own near-term earnings.
Despite its ambition to become a yuan trading hub, London currently lacks an official clearing bank for the tightly controlled currency. That means trades have to be routed through Hong Kong, Singapore or Taiwan. Creating a clearing bank in London is in the gift of the People's Bank of China, but it has not yet done so.
Instead, StanChart and partner Agricultural Bank of China are trying a "market-led" solution. They will let financial institutions open clearing accounts in the United Kingdom at either bank and settle trades, with the backing of StanChart and AgBank's own pools of yuan liquidity. In theory, any bank could do the same if it were prepared to shoulder the complexity and cost. And it won't necessarily draw new yuan out of China; just reallocate what's already offshore.
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StanChart's gambit is thus to compete on price. Its clearing accounts will offer rates starting from 0.88 percent, compared with around 0.6 percent from Hong Kong's designated yuan clearing bank, Bank of China. StanChart will also waive fees on transactions for the first year. That is likely to secure a healthy inflow of deposits - though earning a return may be difficult since highly liquid yuan assets aren't too thick on the ground.
The real rationale isn't short-term profit, but rather to steal market share from other banks like HSBC, which are also jostling for a share of yuan business. StanChart presumably thinks that advancing the use of the currency will generate political goodwill and future market access in China too. The concern is that other lenders will come to the same conclusion. The result may be banks competing ever more fiercely for a growing but not obviously profitable prize.
