Finance Committee on Feb. 24th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting number 68 of the Standing Committee on Finance, orders of the day pursuant to Standing Order 108(2), study of the Canadian Renminbi Trading Centre.

We're very pleased to have three witnesses presenting here this morning. First of all, from the Canadian Council of Chief Executives, we have Mr. Brian Kingston. Welcome.

We also have Eric Lemieux, Director General of Finance Montréal.

Welcome to the committee.

From Toronto by video conference we have the Toronto Financial Services Alliance, the president and CEO, Ms. Janet Ecker. Welcome. Thank you so much for being with us.

I want to thank all of you for being here. You'll each have five minutes for your opening statement, and then we'll have questions from members.

We'll begin with Mr. Kingston, please.

[Brian Kingston, Senior Associate, Canadian Council of Chief Executives]

Good morning, Mr. Chairman, committee members. Thank you for the invitation to appear before you to discuss the Canadian Renminbi Trading Centre, or RMB hub.

The Canadian Council of Chief Executives represents 150 chief executives and leading entrepreneurs in all sectors and regions of the economy. Our members collectively lead companies that administer $6 trillion in assets; have annual revenues in excess of $850 billion; and are responsible for the majority of Canada's private sector exports, investment, and training.

The CCCE strongly supported Canada's efforts to secure an RMB hub, as we believe it will deliver significant benefits to Canadian businesses, financial institutions, and the economy. I'm going to begin today by discussing some of the benefits of the RMB hub and then conclude with recommendations on what Canada needs to do to ensure the hub is a success.

To start with the benefits, the most significant benefit to Canada of the RMB hub is its potential to facilitate trade. Canada and China have a large and growing trade relationship. China is Canada's second largest national trading partner, while Canada is China's 13th largest trading partner. Despite historically resource-intensive trade between Canada and China, trade is diversifying with services trade trending upward, increasing more than 50% from 2007 to 2012. There is also a shift toward trade in value-added goods like manufacturing exports. But there is room for significant growth in our trade relationship, as Canada remains a much smaller partner to China than other countries with similar complementary sectors. For example, China's imports from Canada only represent 1.3% of total imports, which is low when compared with those from Switzerland or Germany where imports are 1.5% and 5.1% respectively.

A number of sectors hold great potential for increased trade. Canada only provides 0.2% of China's total petroleum and gas compared with Saudi Arabia at 19%, Angola at 14%, and Russia at 9%. Similarly, China has significant export capacity in industries such as machinery and equipment, manufacturing and electrical machinery, but only supplies 10% and 16% of imports to Canada compared with the U.S., which provides 56% and 46% respectively.

The RMB hub has the potential to improve Canada's trade with China by reducing foreign exchange costs for importers and exporters, facilitating both trade and investment. Dealing in RMB also gives Canadian businesses a competitive advantage when selling to Chinese trading partners that prefer RMB-denominated transactions. According to estimates from the Canadian Chamber of Commerce, whom you heard from last week, denominating exports in RMB has the potential to grow Canadian exports to China by an additional $21 billion to $32 billion over the next 10 years.

In addition to benefiting both importers and exporters, the RMB hub creates new opportunities for Canadian financial institutions. Along with the Mexican peso, the RMB has witnessed the most significant rise in market share among major emerging market currencies. The RMB is expected to become one of the three most traded currencies in the world in 2015. This will take China's financial integration with global markets to a new level. Securing the first RMB hub in the Americas gives Canadian financial institutions a distinct first mover advantage and the provision of RMB-denominated financial services to Canadian businesses and firms in the western hemisphere that have commercial ties with China. Such services can include corporate RMB accounts, lines of credit, and facilities to transact foreign exchange and make payments in RMB.

Now moving on to what needs to be done to ensure the success of the RMB hub. As you heard last week from the ICBC, Canada has a relatively short window of three or four years to take advantage of its RMB trading hub before China is expected to liberalize its capital account, reducing the competitive advantage that the hub creates. To make the most of this opportunity, Canada must establish a long-term vision for deeper Canada-China engagement that includes the following two actions. One, it must create a strategic partnership with China. The lack of a more developed and on-going China strategy in Canada is a major gap in our economic portfolio, especially considering that China is Canada's second largest trading partner after the U.S. Without such an agreement we risk falling behind our competitor nations. Two, it must launch free trade negotiations with China. Canada must take the next step in our trade relationship by launching bilateral free trade negotiations. Eliminating trade and investment barriers will give Canadian businesses a competitive advantage.

In conclusion, the CCCE congratulates the government on securing an RMB hub in Canada. Canada has the opportunity to be a market leader but we must act quickly.

I'd be happy to answer any questions. Thank you.

[The Chair, Conservative, James Rajotte]

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

Mr. Lemieux, please go ahead.

[Eric Lemieux, Director General, Finance Montréal]

Thank you, Mr. Chair.

Thank you very much for inviting me to participate in this committee.

As a representative of Montreal's financial services industry, let me share our views on the implementation of a renminbi trade centre in Canada. Overall, we are very positive about establishing a renminbi trade centre in Canada. Canada and China have long-standing relationships. Those historic ties are deep and represent a very good foundation on which we can continue to build, notably in the financial services industry.

The internationalization of the renminbi represents an opportunity to write a new chapter in the bilateral relationship between Canada and China. In our view, there are two main areas that will be impacted by this major development.

First, Canadian companies will be able to trade directly in renminbi with their Chinese business partners. This should increase commerce between our two countries and increase the competitive advantage of Canadian companies versus those of other countries due to lower foreign-exchange costs.

Second, Canada's financial services industry, including that of Montreal and the province of Quebec, will be able to create and distribute financial products in renminbi. This will generate a new line of business for financial institutions, provide new investment opportunities for institutional and retail clients, and further increase the profile of recognition of the expertise found within Canada's financial services industry.

The Canadian renminbi trading centre will also benefit China, whose economy is shifting from being oriented to the production of manufactured goods towards favouring national consumption and global investment in strategic industries. With a renminbi trading base in Canada, China will have direct access to North and South American financial markets that operate within the same time zones. The Chinese will also benefit from a solid financial system in Canada with its world-class expertise, proven legal framework protecting investors and consumers, and a favourable fiscal regime.

I would like to add that increasing financial relationships between Canada and China isn't just a bet on growth. It's also an investment in change. Change in the way we do business together. Change in the vehicles allowing access to Chinese markets. Change in the behaviour of Chinese and Canadian finance professionals as they become more accustomed to the practices of one another. To summarize, it's an investment in a more collaborative future between our countries and financial communities.

Finance Montréal supports Toronto and Vancouver in their will to act as the main Canadian hubs of renminbi trade. As Canada's biggest financial centre with most of the foreign exchange operations, Toronto has the capacity and the know-how to handle a significant share of the renminbi transactions and their clearing activities in Canada.

Vancouver, for its part, as the Pacific gateway to Asia, is also very well-positioned. It has a substantial Chinese-speaking population and British Columbia has an incentive program that exempts foreign exchange trading from provincial taxes. B.C. also took the lead in the renminbi market in November 2013, becoming the first provincial government to launch a "dim sum", or renminbi-denominated bond, worth nearly $425 million.

Now, what specific role can Montreal play in establishing and operating an offshore renminbi market in Canada?

In Quebec, there are about 150,000 jobs in the financial services industry, out of which 100,000 are located in Montreal. The GDP of the financial services industry amounts to 6.2% of the province's total economic output. Montreal is ranked 18th in the world in the Global Financial Centres Index. In 2008, Montreal was 31st in this global ranking. So the local industry has performed well since the crisis and the volume of international business has increased in Montreal over the last few years.

Montreal wants to play an active role in putting in place and operating a renminbi trading centre in Canada. On top of creating and distributing financial products in renminbi, Montreal's financial community will play a specific role in the renminbi market: on the derivatives side. As the Montréal Exchange is the derivatives trading hub for Canadian securities, renminbi derivatives created by financial institutions will be traded in Montreal. Our city is specialized in this cutting-edge area of financial services.

Renminbi futures or currency swaps will diversify the offer of products traded on the Montréal Exchange, while increasing its international appeal.

Montreal has a special relationship with the city of Shanghai, which has been its sister city for nearly 35 years now. One example of the close collaboration between Montreal and Shanghai is a partnership signed in 2013 between Finance Montréal and the Shanghai Financial Association. This deal will increase exchanges of students and professionals of our financial services industries, particularly in the derivatives trading sector.

In 2013 and 2014, representatives of Finance Montréal visited the newly created Shanghai free trade zone, which was designed to facilitate the international trade of goods and services. It was also conceived to increase investment and financial liberalization, including full convertibility of the renminbi, which will further open up the banking sector.

These personal ties and direct contacts between Montreal's and Shanghai's financial communities could be leveraged and further increased by the new renminbi trading centre in Canada. We also see an increasing interest from Chinese banks in opening up branches in Montreal, such as the Bank of China, which opened its first office in 2013. Industrial Bank of China has also announced its intentions to open its first branch in Montreal in 2015.

The Canadian renminbi trading centre could accelerate the penetration of the Montreal market by Chinese financial institutions, a development which we support. All these elements bode well for the financial relationship between China and Canada and also for Montreal, as part of Canada's financial community.

It is now up to us as a nation to seize the opportunities that will arise from this renminbi trading centre and thus further develop a win-win partnership with our Chinese counterparts.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Next, we will go to Janet Ecker in Toronto, please.

[Janet Ecker, President and Chief Executive Officer, Toronto Financial Services Alliance]

Thank you very much, Mr. Chair and committee, for this opportunity.

I'm Janet Ecker, president and CEO of the Toronto Financial Services Alliance. With me is Sheryl Kennedy, who is the CEO of Promontory Financial Group Canada and a former deputy governor of the Bank of Canada. Sheryl and her firm were advisers to the TFSA in its leadership role on the RMB initiative.

We are a unique public-private partnership dedicated to growing Toronto region as a top 10 international financial centre. We're a collaboration involving three levels of government, the financial industry, and academia, and we work to grow the sector, to strengthen our global reputation, and to enhance our competitiveness as an international centre.

It was a logical step for us to seek an agreement with China to designate Canada as an RMB trading hub. Let me explain.

As members know, Canada's economy is becoming more globally oriented. International trade and investments contribute more to the country's bottom line, with China now our second-largest trading partner, after the U.S. Bank of Canada governors and the Canadian government are encouraging our businesses to reach out around the world.

Our financial industry is part of that story. After surviving the global crisis relatively unscathed, financial firms used this strength to grow their global footprint, thus benefiting our economy.

For example, financial services trade continues to expand. Since 2000, global exports have tripled, while Canadian exports have nearly quadrupled. The financial services share of total Canadian services exports rose steadily, almost doubling from 5.9% a decade ago to 11% in 2013. Canada's outward financial services foreign direct investment has more than tripled since 1999. In 2013, the sector accounted for 53% of Canada's total FDI stock abroad, up from 44% a decade earlier. One third of Canadian banks' revenue is generated from outside Canada. Canadian insurance firms such as Manulife and Sun Life rank among the top 20 in the world and are active in Asian markets and beyond. Canada's large pension funds rank number three in the world in terms of assets and are well regarded global investors, particularly in infrastructure projects, a pressing need in Asian and other markets.

We also recognize that China was seeking to internationalize its currency and had already designated a number of trading hubs in such places as Hong Kong, Singapore, and London. A centre for the Americas only made sense.

To achieve it, however, would take the collaborative efforts of the financial industry and government. As is typical of TFSA initiatives, we reached out to our industry and government partners to create a working group to drive this initiative. Its members include representatives of a cross-section of domestic and international institutions active in Canada, as well as the federal and Ontario governments and the Bank of Canada as observers.

We were also very pleased that a broad spectrum of business and other organizations supported the initiative. The Canadian Chamber of Commerce, the Canadian Manufacturers & Exporters, the Canada China Business Council, the Canadian Council of Chief Executives, Toronto, Finance Montréal, AdvantageBC, the B.C. government, the Asia Pacific Foundation, and Export Development Canada have all lent their support. It is particularly worth drawing the committee's attention to the fact that AdvantageBC, TFSA, and Finance Montréal are working collaboratively on this initiative, underlining both the national reach of the industry, despite the fact that it is headquartered in Toronto region, and the fact that the benefits of this agreement will accrue across the country.

As the committee knows, in November Prime Minister Harper signed the agreement with China to designate Canada as an RMB trading hub for the Americas. I had the privilege of attending the announcement in Beijing and would like to congratulate the government on this successful initiative.

The committee knows that there are three measures that were part of the agreement: designating the Industrial and Commercial Bank of China as the clearing bank, setting up the reciprocal currency swap line, and also establishing a renminbi qualified foreign institutional investor quota to Canadian financial institutions

What does this mean for the economy and Canadian business? The measures announced will allow direct exchange and trade operations between our two countries. As a result, Canadian firms doing business with China will no longer be required to settle their transactions through an intermediate currency such as the U.S. dollar, thereby mitigating currency risks and reducing transaction costs. An HSBC survey showed 55% of Chinese businesses said they would offer discounts to their trading partners for RMB-denominated transactions.

On the broader economic impacts, TFSA sponsored the Canadian Chamber of Commerce report that cited direct trade benefits alone of an RMB trading hub at over $32 billion over the next 10 years. In addition, Canadian financial institutions will benefit by being able to provide a broad range of services and products throughout the Americas: trade finance, contract bonding, chequing accounts, short-term liquidity, long-term financing, and investment products.

The bottom line is that this agreement will continue to raise our stature as a global financial centre with a major financial industry in this country, facilitate increased investment in trade, and strengthen Canada's broader economic relationship with China. As we seek to broaden our base of trading partners, building the reach and expertise of our financial sector and emerging economies around the world is critical. This is another important step in that direction. We now need to take advantage of this opportunity.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now go to members' questions.

We'll start with Mr. Cullen, for seven minutes.

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

Thank you, Chair.

Thank you to our guests for being here. I don't have a great number of questions. Some of the testimony we've heard this morning has been supportive, as Mr. Kingston and others have said, of testimony we've heard before. Some of the paths we've already been down before, so I won't repeat those.

Mr. Kingston, I think you talked about the “first mover” advantage. Can you elaborate a bit more on that? What distinctly needs to happen, or what may happen in the next three to four years, before other North or South American competitors bring a hub into their jurisdictions?

[Brian Kingston]

Yes, the first mover advantage is critical. It will really be important first for financial institutions. Canada, being the only country in the Americas to have this designation, has a very short window before China liberalizes its capital account to offer these services, not only to Canadian companies but to companies in the Americas that deal with China.

The second piece of this is taking advantage of the lower transaction costs and increasing trade with China. For companies particularly in resources where margins can be particularly thin, having this lower transaction cost means there's actually a chance to beat out competitor countries and win contracts in China.

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

I know it's speculative, and you're not in the industry yourself, but if, for example, there are two LNG proposals happening, is there a lower transaction cost if you're able to trade in RMB coming through Canada than the States?

[Brian Kingston]

Yes, there would be lower transaction costs there. Other examples—

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

Let me stop you on that one. We also heard from another witness that American or South American companies may come through Canada's trading hub in order to make deals happen in their home countries. I want to distinguish where the advantage is and isn't. Let's just take LNG as an example, because it's a live issue in the province that I and Mr. Saxton and others come from.

If an American firm wants to set up an LNG deal with China in America, can they not use a hub through Canada to lower those transaction costs, the same way a Canadian firm would trying to access a deal here in Canada directly?

[Brian Kingston]

I don't know the specifics of how that deal would work, but I would think an American company could use a Canadian financial institution to negotiate that deal.

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

Right.

Is that perhaps where the benefit actually is for Canada? It wouldn't necessarily be on any difference in terms of a new specific resource development that may or may not happen, but it would help the financial service sector of Canada if they have that first mover advantage in terms of completing the deal. I'm looking for where the benefit is and where deals would happen that would not otherwise have happened because of this hub, in terms of Canada versus our competitors. Is it mostly on the financial services side of things where Canada has that first mover advantage? Is that fair to say?

Mr. Lemieux, we'll start with you, and then perhaps Ms. Ecker.

[Eric Lemieux]

I'm going to answer in French.

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

Yes, of course.

[Eric Lemieux]

As I see it, there are two advantages. The first, as you mentioned, is to position Canada to perform renminbi exchange and clearing transactions, not only for Canada, but also for the U.S. and South America. That is a possibility. It's an advantage for us because people would benefit from going through our financial institutions. It benefits our financial institutions.

Second, let's look at those who can benefit from renminbi. I assume you're from Alberta, oil country.

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

I'm from British Columbia.

[Eric Lemieux]

Let's take Bombardier, in Montreal, for example. It makes airplanes. The fact that it's in Canada, close to the financial institutions it deals with, means it doesn't have to go through the U.S. dollar. Similarly, that proximity allows businesses who already deal with Canadian financial institutions to benefit more quickly than other companies that will eventually have to do business elsewhere.

But you are right. As I see it, it's not a long-term benefit. Other companies could also benefit and have the opportunity to do business with—

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

Ms. Ecker, I have only a short amount of time. If you have a brief response, that would be helpful.

[Janet Ecker]

Anything we can do that makes business deals easier, faster, and less costly is a good thing. I think the win-win about this particular agreement is in the ability to have the direct exchange between the two currencies. It's a win for financial institutions in terms of being able to conduct more business, but it's also a win for Canadian businesses in terms of making it easier for them to do business with Chinese businesses.

I think, as the HSBC survey that I cited indicated, Chinese businesses were prepared to have discounts or longer trading relationships, better deals, if they could do it in sort of direct Canadian to renminbi and back again. It's something that just makes it easier, simpler, less costly, less risky, and promotes stronger business relationships. So it's a win-win for both financial institutions and Canadian business.

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

Thank you very much.

I have one last question to Mr. Kingston. I know this isn't your association particularly, but we can imagine larger firms that already have international relations taking advantage of this.

One of the things I've been struggling with, being a former small business person myself, is where the mom-and-pop shops fit into this equation. I know they're not active members in your group, but trying to imagine deals that would not otherwise have happened for some of the smaller value-added businesses in Canada, how accessible is this going to be? These seem like relatively high-end commercial transactions.

[The Chair, Conservative, James Rajotte]

Just a brief response, please.

[Brian Kingston]

I think the advantages for SMEs could be significant just because of that transaction cost decline that will occur here. As you know, the large companies already have big operations and are active in China. But I think SMEs looking to export to China can use this as a way to do so now, because it will actually make them more competitive in the market.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Cullen.

We'll go to Mr. Saxton, please.