Finance Committee on Feb. 17th, 2015

[Paul Chilcott]

Typically agreements of this kind between central banks do remain confidential. The PBoC wanted it to be confidential in this case.

To give you a flavour of what's in the agreement broadly, it provides for regular dialogue between the two central banks on the growth of the renminbi and liquidity conditions in Canada.

In many respects it formalizes the kinds of conversations you would typically see between central banks in any case where one central bank had an interest and its currency was being used in another jurisdiction. In many respects I would think it would provide for a kind of conventional central bank dialogue.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

You say that these kinds of memoranda of understanding between various countries' central banks usually remain confidential. Have any agreements between the Bank of Canada and other countries' central banks been made available to the public?

[Paul Chilcott]

I'm not aware of that in the Bank of Canada's case, but that is something we could follow up on.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you. That would be greatly appreciated.

Mr. Zhu, if I have understood correctly, you have expressed certain concerns over the use of the cap on the currency swap line. You don't seem convinced that the Canadian market is sufficient and seem to think that an outside contribution would be needed. You were talking about the rest of the Americas.

Did I hear that right?

[MingXuan (William) Zhu]

Actually, it's not related to the cap of the swap line or something like that. If we want to have a mature market and to be very competitive with other markets, we need greater transaction volumes. These transaction volumes cannot rely solely on the Canadian market. Having greater volume here would benefit our financial institutions. It would encourage us to create innovative products, to serve our customers better, and to be more attractive in comparison with other places in the world.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay. I understand.

To come back to trading volume, do you think the current trade agreement would suffice for the Canadian domestic market?

[MingXuan (William) Zhu]

I don't think so, because the trading volume between China and Canada accounted for only $73 billion in 2013. It was relatively small.

It's closing, but it's still not enough to support a very comprehensive market in Canada for offshore centres.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

When it comes to the cap on the currency swap line, I thought about the fact that companies from other countries wanted to go through the Canadian platform like some U.S. companies.

Do you think this could have an impact on the trade course?

[MingXuan (William) Zhu]

They are sometimes adjusted for the last results for liquidity purposes, but because we have such a facility here, definitely we have some advantages compared with European or Asian centres, so definitely I am quite confident that U.S. participants are willing to work with us to do business with us here in Canada instead of with other countries. We need at least to provide them with enough and very comprehensive product lines to compare with other offshore centres.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Okay.

Can one of the witnesses explain in simple terms why the U.S. government, or the Federal Reserve, has not yet ratified an agreement? Is something currently being negotiated? Could someone tell us whether there is a similar platform in the United States?

[Rob Stewart]

That's a question that's very difficult to answer, but it relates to a question that was asked earlier. China and the U.S. have a very broad and complicated relationship and in that context have ongoing dialogues on economic and financial matters. We're not aware that in that context they are having any discussions about the establishment of renminbi trading capacity in the United States. That has not, to our knowledge, happened to date.

In relation to the prior question, from an American point of view, they would prefer obviously to invoice and ship goods in American dollars. There is less risk for them, so at the end of the day, it is very much a private sector driven matter and a balance of interests has to determine what currencies are used. In the case of the Americans, the U.S. dollar is the dominant global currency and they would prefer it to stay that way, I am sure.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Merci, monsieur Côté.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

First of all, I want to acknowledge the NDP's support for the trading hub here in Canada. They came on board early last year following their industry critic's trip to China, then following that, the letter to the Minister of Finance. I want to agree with Mr. Cullen. That was a significant move and I thank them for their support on this and for acknowledging the vision that our government had in moving forward on this.

Everybody knows that once a salesman has sold a product, he should stop selling. The product has been sold. We have the trading hub. Just stepping back a bit, whom were we competing with to get this trading hub?

That is for anyone who wants to jump in.

Mr. Gavsie, why don't you answer that one.

[C.J. Gavsie]

We were not competing with anyone. There were discussions among advocate groups in Toronto and Vancouver—

[Mark Adler, Conservative, York Centre, ON]

I mean in North America.

[C.J. Gavsie]

In North America there has been no competition.

Going back to one of the earlier questions as for where the U.S. is on this, Canada, through the industry working group, through both TFSA and AdvantageBC, got themselves together with various colleagues of ours at various levels of government. We did start putting the product together to say what a hub could look like in Canada on a Canada-wide basis, and if we were to bring in other sectors from outside Canada, predominantly the U.S., what that would mean for us and how we would conduct that business. We were an advocacy group that started this. It was not China coming to us.

[Mark Adler, Conservative, York Centre, ON]

No, of course not. However, were there interests in the United States that would equally have welcomed such a trading hub?

[C.J. Gavsie]

Absolutely.

[Mark Adler, Conservative, York Centre, ON]

We were able to convince the Chinese to locate this trading hub in Canada, primarily because of our good economic conditions, sound investment climate, seventh year in a row that our financial sectors are rated the best in the world by the World Bank. We had the proper positive economic and investment conditions that led to China choosing Canada over any other jurisdiction where they might want to locate a trading hub. Is that correct?

[C.J. Gavsie]

That is correct, yes.

[Mark Adler, Conservative, York Centre, ON]

Okay.

Now jumping ahead a bit, Mr. Chilcott from the Bank of Canada, we live in uncertain economic times. In the event of a credit crisis, what have the Bank of Canada and the Chinese done, what kind of an agreement have you entered into to backstop any kind of credit crisis?

[Paul Chilcott]

The swap agreement would enable us, if we judged Canadian financial stability considerations to warrant it, to draw on that swap to lend to Canadian financial institutions. But I would observe, in relation to the last crisis, that we didn't activate any of our swap. Unlike some other jurisdictions which did activate some of their swaps with the U.S. federal reserve, we didn't need to. So it's an extreme consideration.

[Mark Adler, Conservative, York Centre, ON]

Just to be specific then, is there a three-year $30 billion currency swap currently in place as a result of this agreement, that the Bank of Canada will step in and backstop any potential Canadian loss?

[Paul Chilcott]

No, we would lend in the event that we thought the financial stability considerations in Canada required it. That's not the same as backstopping any particular investor.

[Mark Adler, Conservative, York Centre, ON]

So there is a provision in place then.