Finance Committee on Feb. 19th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 67 of the Standing Committee on Finance. Our orders of the day are pursuant to Standing Order 108(2) continuing with our study on the Canadian renminbi trading centre.

We are very pleased to have three witnesses with us here this morning.

With the topic as well I'm reminded by a colleague we should note that it is, I think, the first day of Chinese New Year, the Year of the Goat. I want to wish a happy new year to all of you.

First, from the Canadian Chamber of Commerce, we have Mr. Hendrik Brakel, senior director, economic, financial, and tax policy. Welcome to the committee. We have from the Canada China Business Council, the president, Mr. Peter Harder, who had a very distinguished career with Foreign Affairs, Industry Canada, and other departments within the government.

We have, and we want to thank this gentleman very much for appearing at a very early hour from British Columbia, by video conference from Victoria from the British Columbia's Ministry of Finance, Mr. Jim Hopkins, the assistant deputy minister.

Thank you very much for appearing. What time is it there in British Columbia now?

[Jim Hopkins, Assistant Deputy Minister, Provincial Treasury, British Columbia Ministry of Finance]

It's 5:45 a.m.

[The Chair, Conservative, James Rajotte]

Yes, 5:45 a.m.

Thank you very much for being with us at that very early hour.

Gentlemen, we'll start with Mr. Brakel, and then we'll proceed in order with your presentations. Then we'll have questions from members.

Please do begin.

[Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy, Canadian Chamber of Commerce]

Thank you, Mr. Chair.

I am honoured to appear today before the members of the committee.

I'm very excited to be here today to talk about Canada's new renminbi hub for two reasons. First, the internationalization of the renminbi is perhaps the biggest megatrend in global finance since the introduction of the euro. With approximately $4.3 trillion in trade last year, China is well on its way to becoming the world's largest trader. This will fundamentally reshape the global economy.

The second reason I'm excited is that the Canadian Chamber of Commerce represents 200,000 businesses, and many of them are very excited by the opportunities to do more business with our second-largest trading partner. What does the renminbi hub mean for Canadian business? We think it's probably the best, most effective way to boost trade with China. We now have, or soon will have, the financial infrastructure to easily make payments and receive payments in renminbi right here in Canada.

There are big benefits for trade. First, there will be big savings on foreign exchange. We don't have to do everything in U.S. dollars, and there's no need for the intermediate conversion from RMB to U.S. dollars to CAD. We estimate that this could result in savings of $6.2 billion over 10 years.

The second big benefit, and the more important one, is more trade, doing more deals with China. In speaking to Canadian exporters, we learned that many of the big commodity deals for such products as coal, iron ore, metals, and lumber were extremely sensitive to payment terms. The prices are set globally, so if a buyer is given 120 days as opposed to 90 days, that could make all the difference and be a huge help in getting deals. We know that many Chinese companies prefer to do business in renminbi. A survey by HSBC said that 55% of Chinese companies were willing to give discounts of up to 5% if the transactions were done in renminbi. A similar survey by the French bank BNP Paribas found that the discounts were between 1% to 3%, and were pretty commonplace, for transactions in renminbi.

On the intangible side, a lot of exporters told us that trade is about building relationships. Customers have to see you as a partner who really understands their needs. The HSBC survey said that two-thirds of Chinese businesses say that international companies doing business in renminbi build stronger relationships. Then we asked which sectors will see the greatest benefits. As I said, we had sort of assumed that the commodity and natural resource companies would see the biggest benefit because of tight margins and competitive pricing. However, after we released the report last year, we started hearing from companies across Canada who were going to benefit from the renminbi hub who were in niche markets that we hadn't thought of, frankly.

There is a company in Toronto called Lord Cultural Resources. They're a small company of consultants who design and set up museums. They do everything from the architecture to the exhibits to the technology. These guys have done the Louvre. They've done the Art Institute of Chicago. They actually did Graceland in Memphis. They designed the whole Elvis thing.

At any rate, this is big business in China because tourism is enormous. Their challenge is that their customers in China are not the big multinational companies that are importing and exporting in U.S. dollars all the time; it's a local museum or a local government or an educational institution. They tell you that you can pay them in renminbi, because it's a big advantage for them. It makes their lives so much easier. They subcontract to local Chinese suppliers, to local Chinese builders, a lot of the work in doing these museums, so the ability to pay in renminbi actually makes their lives a lot easier. They also say that a lot of their competitors are companies in the United States, and that could give them a competitive edge. That's actually where you get big savings on foreign exchange, when you're recycling renminbi. You're being paid in it and then you're paying out your suppliers. A lot of companies in Canada export to China but also use Chinese suppliers as inputs, so they're both buying and selling.

From the study we did back in September, we estimate that the direct benefits of the renminbi trading hub over the next 10 years would be somewhere between an additional $21 billion to $32 billion in additional exports, plus discounts on imports totalling $2.8 billion. There are also significant advantages for Canadian banks in how they serve their U.S. customers and do more trade finance deals. There are enormous opportunities on the investment side. China is not just a trading nation; it's also a saving nation.

In 2013 offshore renminbi deposits amounted to $1.6 trillion. It's an enormous pool of capital available to companies. We're excited to see Export Development Canada and the Government of British Columbia be the first sovereigns in the world to issue bonds in renminbi. We can't wait to see the first Canadian business raise renminbi funds. There's a ton of advantages in this renminbi hub.

I'm happy to answer any questions, but first we want to thank the government for all the efforts, diplomacy, and negotiations that went into getting the renminbi hub here in Canada. We want to thank the Standing Committee on Finance for your work on this very important issue. It means a lot to Canadian business.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Harder, please.

[Peter Harder, Policy Adviser, Dentons LLP, and President, Canada China Business Council]

Thank you very much, Mr. Chair.

As you indicated, I'm here representing the Canada China Business Council as its president, but also in my own right as a former deputy minister of foreign affairs and as the first co-chair of the Canada-China strategic working group, a group of bilateral officials that was established 10 years ago to examine ways in which to strengthen the business and political relationships between the two countries.

The Canada China Business Council, the CCBC, has about 250 member organizations, which represent a broad range of sectors of the Canadian economy. Our members include companies, educational institutions, and governments at all three levels. Increasingly, by the way, municipalities are getting into the economic development game in a very sophisticated fashion, particularly with a focus on Asia.

Our corporate members are approximately two-thirds small and medium-sized enterprises. We provide our members with services that help them do more business between Canada and China. The council has chapters in Ontario, Quebec, Alberta, British Columbia, and then in Beijing and Shanghai.

With respect to the subject before us, in December 2012 the CCBC and the Toronto Financial Services Alliance began discussing the possibility of an RMB trading hub in Canada. At a meeting in January 2013, we convened representatives from two Canadian banks and two Chinese banks to assess their interest levels, which were, I would say, moderate but not overly enthusiastic. Nonetheless, there was enough interest for the TFSA to commission a report examining how such hubs had worked in other jurisdictions. Remember, there is not, until now, a hub in the Americas. By the time the report was presented in June 2013 to a larger group of financial industry stakeholders, the enthusiasm level among players had significantly enhanced, and we observed stronger support in some respects reflecting the growth of RMB use worldwide.

This growth in RMB use has accelerated, including in Canada, although, I'd have to admit, and your report shows, it was a very small base to begin with. However, by mid-2014 it was clear that Canada was lagging behind its peers in use of RMB for trading, even behind peers in the United States, which, I would remind this group, still has not succeeded in achieving an RMB hub.

The CCBC feels strongly that the establishment of a North American RMB trading hub in Canada is a very positive development for Canadian business. We applaud Finance Canada and the Government of Canada for making the announcement a key deliverable in the Prime Minister’s November trip to China, which I had the pleasure of hosting the luncheon for.

Why are we in favour of this hub? As the very good report by the Chamber of Commerce summarized last October, and I quote, “This has created a unique, once in a generation opportunity for Canada’s businesses and banks to leap ahead of competitors and become early adopters of RMB, currently the world’s fastest growing currency.”

This is a very positive development in the bilateral relations, and we need to have positive developments in this relationship. In the background, where it's taken two years to ratify the FIPA, where the adjustments to the foreign investment review process involving SOEs has generally been not well received in China, and where Canada has yet to respond to the complementarities study, which was released in 2012, where both parties identified key sectors for future trade liberalization, this is a welcome, positive step and one that should go noticed and underscored by all of us involved in the bilateral relationship.

The RMB is a perfect, non-controversial relationship builder in an environment with many controversial elements. It is non-controversial because it’s about putting more money in Canadian companies' pockets. Right now, with most sales and purchase contracts denominated in U.S. dollars, Canadian companies incur significant exchange and transaction costs. As Mr. Brakel referenced, these costs are not just one-way exchanges but often three-way exchanges. That adds to the burden of very small margins.

Many Chinese companies are happy to deal in RMB, as this lowers their transaction costs as well. Research has shown that they are willing to share the savings with their vendors and customers.

The hub also provides a useful hedge for Canadian companies that invest in China. Let me give you an example using our own council. As I mentioned earlier, we have offices in both Shanghai and Beijing. Our representative offices can incur expenses in China, but any revenues must be generated outside of China. Therefore, every month we must wire money to cover our expenses. With the Canadian dollar declining by about 25% in the last year or so, we value the opportunity to convert RMB dollars and hold them, so that we can have a much more predictable rate of expense in our Chinese offices in Shanghai and Beijing.

Some people ask why we need a hub if we are already seeing growth in RMB use. Well, the existence of the hub will both increase awareness amongst Canadian companies, and more importantly, at least in our view, encourage small and medium-sized businesses to participate in the growing Chinese market, which we all agree is important for us.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Harder, for your presentation.

We will now go to Mr. Hopkins, please.

Mr. Hopkins, can you hear me okay?

[Jim Hopkins]

I can. Thank you very much.

[The Chair, Conservative, James Rajotte]

Please begin your presentation.

[Jim Hopkins]

Bonjour.

Thank you for the opportunity to speak to you today about Canada's new RMB hub for North America. I applaud the committee's interest in the hub and particularly in diving into the potential opportunities that the hub affords for Canada's economy.

British Columbia, back in 2012, assumed an early leadership position among provinces in identifying that the creation of an RMB hub in Canada had huge and positive potential for Canada's trade and investment relationship with China. The fact that this was of interest to British Columbia and that B.C. was one of the first ones to identify this probably reflects our significant and growing trade relationship with China and also the fact that we both live on the Pacific and have had demographics and people exchanges going back many generations.

As B.C.'s trade with China grew and since it wanted to develop a closer financial and economic relationship with China, the province became the first foreign government to issue an offshore renminbi bond in late 2013. This provided an important and strategic validation of the international use of RMB. The bond issue was an overwhelming and global success with buyers from Asia, North America, and Europe participating.

Throughout 2014 the British Columbia government, led by Finance Minister de Jong and staff, collaborated with the Governments of Ontario and Canada as well as with industry to consider the merit of an RMB hub in Canada. In late 2014 the province issued another RMB-denominated bond in the offshore capital market. This time it was also received with great success by buyers again from Asia, North America, the Middle East, and Europe. We now have the largest outstanding bond issue by a foreign government, matching that by the United Kingdom, with a three billion RMB bond equivalent to about $550 million.

As the speakers before me have noted, in November Canada was designated an RMB trading hub for North America. I would echo Hendrik and Peter in congratulating the federal government for providing this leadership in positioning Canada to diversify its trade.

The B.C. government was certainly very supportive of this designation, which as you know includes an RMB settlement and clearing centre operated by the Industrial and Commercial Bank of China as well as a quota to permit qualified Canadian fund managers to invest in mainland bonds and equities on behalf of clients.

It's important to reiterate that the RMB hub is not a place; it's a way of doing RMB-denominated business, trade, banking, and investment. The location of the clearing centre does not define the hub. Indeed it must be a pan-Canadian initiative that seeks to engage Canadian business across the country. I think that's what the Government of Canada with the People's Bank of China has created here in Canada.

The creation of the hub recognizes that the RMB is important internationally and that the international use of this currency is proceeding very quickly. China is now the second-largest economy in the world. It's on the path to becoming the largest. It is already the largest trading nation. The use of RMB has been growing exponentially since the early 2000s. Currently 10.5% of China's trade is settled in RMB. HSBC forecasts that could increase to 30% by 2015 or over $1 trillion USD equivalent.

The designation of Canada as an RMB trading hub certainly does play to British Columbia's strength as the Canadian province that trades most with China. Our exports represent about 30% of Canada's total exports, or $6.6 billion in 2013, and it does hold tremendous potential for B.C. business.

Hendrik articulated very well and in a very compelling way the business case for the hub and for the opportunity it affords to Canadian businesses. The only thing I would add to the study findings from the Chamber of Commerce is that, as noted, exports were expected to increase in the range of $21 billion to $32 billion over the next 10 years, and British Columbia, as the leading exporter to China among provinces, will likely be a significant winner with an additional expected $9.4 billion in exports over the 10 years. The lion's share of these export gains would be expected to occur in the more competitive resource sectors, particularly forestry.

Over the next couple of years the British Columbia government will continue collaboration with the Government of Ontario, the federal government, and industry. Really, a big part of our initiative that we see as necessary is marketing the hub to business as well as educating Canadian business on how to engage with Chinese counterparties in productive RMB trade and investment.

We have formed an informal steering committee with the Province of Ontario, Ontario finance; with AdvantageBC, which is a financial institutions group out of Vancouver; as well as with the Toronto Financial Services Alliance. Here we want to promote private sector use of the RMB as well as foster private sector leadership for a Canadian hub.

We will be supporting the Industrial and Commercial Bank of China—

[The Chair, Conservative, James Rajotte]

Could I get you to wrap up, Mr. Hopkins? We'll go to members' questions shortly.

[Jim Hopkins]

I can stop there and just say that the observation has been made that currently, the use of the RMB in Canada is not as significant as in other jurisdictions around the world, and it will, therefore, be very important that the next couple of years be spent on marketing and educating businesses on that opportunity.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions for seven minutes.

We'll go to Mr. Cullen, please.

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

Thank you, Chair. Thank you to our witnesses, and thank you, in particular, Mr. Hopkins, for getting up early.

Starting off with Mr. Brakel, this is still a controlled currency that we're dealing with. Essentially, the People's Bank still controls how much the Chinese are able to buy and how much the renminbi can be exchanged for—1% or 2%. It increased just this past year.

[Hendrik Brakel]

Exactly. It's pegged to the U.S. dollar, but there's a band where they can trade within 1% or 2% of this.

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

We've been broadly in support of this initiative from the government, and my predecessor wrote to the government back in June of last year urging the government to act on this.

I'm wondering about any exposure risks we may have if we were to see a large influx of Canadian companies. Our central bank is backstopping this to $30 billion in case of crisis or any financial meltdown of significant size.

With our not having any influence on the levers of this pegging—the Chinese have committed to float the currency, but we don't know when, and it's been somewhat of a long-standing commitment—are there any downside risks for Canada if Canadian firms or the Canadian government, bondholders, are highly exposed to a currency that is artificially pegged?

[Hendrik Brakel]

Well, firstly, with regard to individual businesses, it actually makes life easier for individual businesses because they are better able to hedge now, because there will be a bigger pool of resources.

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

They know exactly where it's going to be.

[Hendrik Brakel]

That's why we were saying thank goodness there's the ability to hedge. It makes it much easier.

We talked to some companies and actually some of the banks that said there are Canadian companies that are doing business in renminbi now, but it's so difficult to hedge. You have to go through a Hong Kong sub. They're a little bit more exposed now, so we think that's a really good thing.

In terms of our exposure, you were referring to the swap facilities between the Bank of Canada and PBOC. The bank has them with a lot of markets all over the world. They've never been used. They're a sort of backstop to ensure the financial sector that there is sufficient liquidity, even in a really extreme financial crisis.

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

I appreciate that the situation we'd be talking about is quite extreme. The difference between this swap is that it's with a manipulated currency; it's controlled by the central government. That's not the same with the Swiss. It's not...well, I won't say anymore, but it's not the same with other currencies we deal with. I'm just trying to expose if there's any downside risk on that in our exposure over a pegged and controlled currency by a very large trading partner, a globally second, globally competitive, trading partner.

[Hendrik Brakel]

The risk is that China would action the swap and would require $30 billion in Canadian dollars to supply to Chinese banks. China is sitting on foreign exchange reserves of some $430 billion right now, so they have quite a lot of cash.

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

Yet the Chinese are borrowing at an incredibly increasing rate. They've more than doubled the rate of foreign exposure they're using right now within China. Is that all starting to balance itself out? As they normalize the currency, I'm just looking.... You're assuring us that the risk of exposure is so incredibly low for our central bank, but $30 billion is a lot of money to put on the line. They don't want to call it a backstop, by the way, they just want to call it a certain amount of money that's out there to give confidence, I suppose, to the markets.

Mr. Harder, you worked in Foreign Affairs for many years. I think you were trying to describe somewhat the relationship, the on-again, off-again—I don't want to load the term—Canadian relationship, this government's relationship with China, and that certain things take a while.

Could you potentially forward to the committee that study you talked about on what sectors are open for trade? We don't deal with international trade that often and it would be insightful for us.

Am I fair in describing the Chinese perception of Canada's willingness or openness to engagement as on-again, off-again? Is that too extreme a point of view?

[Peter Harder]

I wouldn't characterize it entirely that way. I would characterize it as a relationship that has really matured over the 45 years of diplomatic relations, and even before. Remember, it was Mr. Diefenbaker who sent wheat to China against the express will of the United States at the time.

Where we always advantage ourselves, though, is in establishing agreements and frameworks of working together. That's why this RMB centre is so important. In my view, the reason why the FIPA was important is that this is another confidence-building measure in foreign investment.

The complementarity study—and why I would encourage the Government of Canada to proceed with the complementarity study—is another opportunity for us to establish within the sectors that both sides identified agreed to the lowering of tariffs so that Canadian businesses would compete with Australia, for example, which has a free trade agreement.

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

I spoke to some Chinese businesses, and they expressed confusion with the Canadian position at times. Initially, the Prime Minister expressed concerns about human rights and associating human rights changes with trade, that there was some connection. There's the two-year delay on signing FIPA, but not ratifying; and still the current uncertainty around state-owned enterprises where there are different positions within the Canadian government as to whether Chinese state-owned enterprises should have access to essential Canadian companies, resource companies in particular, but also high-tech and the rest.

I still get a sense that the renminbi's nice and it's good, but there's still some confusion as to whether, for example, China has moved on any of the human rights issues to the satisfaction of Canada to allow these other conversations to advance.

[Peter Harder]

I can't speak for the Government of Canada, but what I can say is that my organization, the Canada China Business Council, would wish both sides to proceed with building more structured frameworks for economic relationships. The most advantageous opportunity we have before us is proceeding on the basis of the complementarity study, which identified key sectors, and I wish we'd do that.