Finance Committee on Feb. 17th, 2015

[Peter Hall]

To answer that question, we have to carefully consider the evolution of the Chinese economy. At this point in time, it has been very clearly stated by the governing authorities that there is an intense desire to shift the economy from a trade-focused economy to a consumption-focused economy. If that's the case, you're dealing with the largest and eventually most powerful group of consumers in the world. That being the case and the growth that's implied by the rise in the Chinese middle class makes now a very opportune moment to capitalize on higher valued-added exports into the Chinese market.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I'll end on this with a question for Mr. Gavsie.

We have primarily been a more raw resource exporter. That's one of the reasons our trade deficit is so large with China. I'll ask you if you've done any research on this in terms of a potential impact on that higher value.

Mr. Gavsie, you mentioned that in places where the hub has been created, there's been an increase in trade. Has your bank done any study on the direct causation or causality of this, or is it that trade has increased with most of these countries over this period of time and countries without a hub over this period of time?

[The Chair, Conservative, James Rajotte]

A brief response, please.

[C.J. Gavsie]

Commercial aspects, yes. From an investor aspect we look at Luxembourg as one of the hubs. That RQFII component that Mr. Chilcott spoke of is one that was not there before. We are seeing investor usage as well as increased commercial, which is much easier to get out heads around.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Cullen.

Mr. Richards, please.

[Blake Richards, Conservative, Wild Rose, AB]

I will start with you, Mr. Gavsie. You touched on it a little bit in response to the last question that Mr. Cullen asked. One of the things that I think I heard universally from the group was that establishing a trading centre would certainly appear to have some positive impacts on the economy. You mentioned in your opening remarks specifically, Mr. Gavsie, about the two-way trade with China and how, if you look at other examples, you would expect there to be a significant increase in that trade.

I would have to assume that when we look at something like this.... I spend a lot of time working on tourism issues. I have a tourism area in my riding and I chair the tourism caucus in our Parliament. When we did approved destination status with China almost five years ago, we saw significant and immediate increases, at least 20% every year since, in tourism coming into Canada from China. Would we expect to see similar kinds of results in terms of our trade through something like this?

You mentioned that you were basing that on other examples. Could you give us some sense, maybe some details or background, on those examples and what kind of increases we're seeing here?

[C.J. Gavsie]

Absolutely.

Tourism is certainly one of the more visible areas of improvement that we're able to see. The other examples would fall within the lumber industry, the fisheries industry, oil and gas. Obviously, we can witness the heavy set of demand by the Chinese economy for some of the Canadian resources. There have been plenty of talks of potentially using CNY or RMB as some form of a funding currency for some countries as we've seen their usage skyrocket in other sectors, other countries and hubs.

As these companies conduct more and more business with Chinese entities, whether it be from an ownership perspective or regular day-to-day commercial trade, we anticipate that will seep in because of their global competitiveness.

In other words, if a lumber, fisheries, or oil and gas company from Canada is competing with other global competitors and those global competitors have the ability to exercise their transactions in RMB, we should have that competitiveness as well. That's where we are deriving our forecasts from as far as the increased usage of the currency here in Canada is concerned.

[Blake Richards, Conservative, Wild Rose, AB]

Would you have any knowledge of other places where these trading centres have been set up in terms of what kinds of benefits they've seen? Would we expect to see similar kinds of benefits?

[C.J. Gavsie]

I'd like to point back at the Luxembourg example, because right now we do not have the RQFII program running here today. We have experienced many professional investors requesting more information about that. As these investors, again, professional investors, look to diversify their portfolios for the Canadian domestics and retailers, they are looking to add and participate on some of the Chinese growth, which their competitors, as an example, out of Luxembourg, can do and they currently cannot. I think one of the most immediate impacts that will be visible to us will be in that investor circle from the RQFII delivery.

[Blake Richards, Conservative, Wild Rose, AB]

Okay. Now, one of the important things when we think of our economy, of course, and one of the things our government has been very focused on is ensuring that we're creating more jobs for Canadians. Would we expect this agreement and this trading centre to create more jobs for Canadians? If so, could you elaborate on how it might actually create jobs?

[C.J. Gavsie]

This was interesting because this came up in conversation in terms of where the hub is to be located, and it was a bit of a misconception. With the hub being virtual, anywhere across Canada, we do expect, from greater economic development and greater competition for Canadian firms, that jobs will be created.

Again, going back to my example, whether it be the financial sector or the various resource sectors that will be using this component, we do expect the jobs to be created there, and we do expect them to be created across Canada, not simply where the main activity or the central activity of a hub is actually active.

[Blake Richards, Conservative, Wild Rose, AB]

Thank you.

Mr. Stewart, I'll turn to you now. In terms of small businesses, I think a lot of us understand somewhat where some of the opportunities are, but what about small businesses specifically? Would they be able to participate in the RMB trading hub? If so, how? How would it help them to be able to grow their businesses?

[Rob Stewart]

This question may be better directed to Mr. Gavsie, as the banker among us, but certainly from the finance perspective, indeed they would be served by this facility—I would think of it more as a facility than as a hub in a physical sense—and that would be through the ability to go to their bank and transact.

For the moment, and I think this has to be understood, the renminbi trades through the U.S. dollar. In other words, the currency pair is U.S. dollars-renminbi. They would be exchanging Canadian dollars for U.S. dollars and U.S. dollars for renminbi. That's the way the market would work.

As it develops over time, the prospect exists, if there is a deep enough and liquid enough marketplace, for a direct currency pair of renminbi transactions for Canadian dollars. At that level and at that sense, where you're eliminating spreads, you would have very direct benefits for smaller businesses that are paying this 5% to 8% that Mr. Gavsie referred to.

[Blake Richards, Conservative, Wild Rose, AB]

Mr. Gavsie, did you have some comment on this?

[C.J. Gavsie]

Yes.

Particularly for the small and medium-sized enterprises, I think the ability to collect and warehouse RMB in a bank account here in Canada is going to be the most advantageous component. Right now they cannot do that. They have to make one payment at a time in a spot transaction where they can exchange their Canadian or U.S. dollars for RMB. Then they have to send it over right away. They cannot warehouse it.

It's not that a small or medium-sized business is going to be warehousing large amounts of RMB. They're certainly not looking to do that, but they are looking for cost-effective transactions rather than a per transaction basis. There are very specific pros to having this here for that particular sector.

[Blake Richards, Conservative, Wild Rose, AB]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Richards.

We'll go to Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Toronto specifically is a global centre for mining transactions. I think the statistic I've heard is that 80% of mining transactions over the last 10 years were transacted in Toronto. Mind you, there's not a hell of a lot happening these days.

BMO has a very strong presence and leadership within the global mining financing business. What will be the impact or the potential synergies between Canada as a global centre of mining finance and the renminbi hub?

[C.J. Gavsie]

It's very common for mining companies around the world to try to operate as much of their businesses in U.S. dollars as possible because when they pull their product out of the ground, and they develop long-term contracts as well as long-term capex projects, they look for a U.S. dollar denominated natural hedge so their receipts are matched up in U.S. dollars.

As global consumption increases, particularly from China, we are likely going to see at some point in the near future some commodity prices measured in RMB rather than simply in U.S. dollars. I think that would be the most immediate aspect to occur, because those discussions have been under way for quite some time. The increased activity by Chinese companies, particularly in the mining sector, is going to put a lot of pressure on that RMB denominated asset. For Canada's competitiveness, as it pertains to the mining sector, it's good to have very close ties and to have a hub in Canada where we can facilitate those transactions. It will be very helpful so they do not have to go to another centre.

[Scott Brison, Liberal, Kings—Hants, NS]

Is it likely that the renminbi hub in Canada will develop an area of specialization around natural resource financing compared to some of the other renminbi hubs elsewhere?

[C.J. Gavsie]

Very much so.

I do believe that as the hub comes into play in Canada, it's now good to give those mining companies the ability to hedge in RMB and continue to conduct their businesses as they see fit without the currency volatility. Over time, as they are required to run more of their business in RMB, this will certainly give them the opportunity they've been looking for.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you.

Mr. Zhu.

[MingXuan (William) Zhu]

I echo Mr. Gavsie's comments.

I decided that the TMX can attract more Chinese mining companies to get listed on the TMX. If those securities can denominate in renminbi, it will help to attract more Chinese mining companies to do that.

[Scott Brison, Liberal, Kings—Hants, NS]

So there's potential for more cross-listing?

[MingXuan (William) Zhu]

Yes.