Finance Committee on Feb. 26th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 69 of the Standing Committee on Finance. Pursuant to Standing Order 108(2), we are continuing our study on a Canadian renminbi trading centre

I want to thank all of our guests for presenting here this morning, both here in Ottawa and in London, U.K.

First of all, we have Professor John Curtis. From AdvantageBC, we have the president and CEO, Mr. Colin Hansen. From the Royal Bank of Canada, we have Mr. Bryan Osmar. From the China Construction Bank, we have Nianbei Sun. From London, we want to welcome Mr. Mark Boleat, chairman, City of London Corporation.

Welcome to all our presenters and thank you so much for being with us. Each of you will have five minutes for your opening statement and then we'll have questions from members.

We'll start with Professor Curtis, please.

[John Curtis, Consultant and Adjunct Professor, As an Individual]

Thank you, Chair. Good morning both to you and to honourable members of the committee.

I'm delighted to have been invited to offer my views on the Canadian renminbi trading centre. I am here as an individual with no particular special interest to advance or to represent.

As to my training and career, you introduced me as a professor, Chair, and I'm a sometime professor, having retired from the federal public service in 2006, leaving the government as the first and founding chief economist of the Department of Foreign Affairs, Trade, and Development. I'm an international trade specialist and economist with a particular interest in how the international trade and the investment regime is influenced and shaped by the international financial system and by domestic economic, social, cultural, and political factors.

Although I'm not a China expert—I'll be the first to admit it—I might add that my interest in that country dates from a very early age. I remember well a distant and squeaky voice on the radio on October 1, 1949, proclaiming the People's Republic of China. I remember my father at the time telling me that this was and would be one of the most major developments in my lifetime and I think he was probably right.

Some 12 years later, as a young adult spending time on the beach at Spanish Banks —those of you from the Greater Vancouver area will know what I'm referring to, overlooking Burrard Inlet—I was looking out at what seemed to be a long line of massive ships full of Canadian wheat destined for China. This is a major event in Canada's economic history and in modern Canada-China bilateral relations that was referred to last week by several of your witnesses here at committee.

Let me make three points. I was always trained to be pithy. Earlier ministers and a prime minister whom I served always said that if I wasn't able to summarize my argument from the second floor of the Parliament Buildings to the first, it was too long. So I'll be very brief.

The creation of a Canadian RMB trading centre, as all your previous witnesses have said, is undoubtedly very good news for Canada, very good news for our financial services sector, and for Canadian commercial enterprises large and small, particularly medium and small business, which I know this committee has been focusing on.

If the concept is explained extensively and clearly to all those involved, or those potentially involved across the country and even abroad, particularly throughout the Americas, before other hubs in our hemisphere come into being, the new Canadian RMB trading centre will be of clear net benefit to us. Amongst all the benefits alluded to earlier in testimony—I've had a chance to read much of it, such as lower transaction costs, better efficiency, etc.—it will further strengthen our already strong and growing financial services sector.

Canadians often seem to forget or to overlook the fact that this country is running a surplus, since 2010 in fact, on our balance of payments in the services account or in the commercial services account. We tend to focus only on merchandise trade. This ongoing strength of ours in the services area, the commercial services area internationally, including financial services, bodes well for our future prospects in the so-called new economy.

Second, the clearing and settlement of financial accounts, important as it is, by no means is the whole story when it comes to international trade activity and performance. In the longer scheme of things it is only a small yet important part. International commercial activity depends largely on what each country can produce, what the other country or countries want from us, and at what price; in other words, supply and demand.

Finally, my third point is that it is important to re-emphasize throughout your consideration, and this discussion, the central role of the United States dollar in global financial transactions. The U.S. dollar won't even be remotely challenged by developments in front of the committee.

Let me say that the process is an ongoing and expected normal result of China's increased share of global trade and investment. We all hope that China's cautious and controlled approach to these matters today will continue well into the future, including what I thought in my presentation might be called “China's peaceful rise in financial markets”.

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Curtis.

We'll go to AdvantageBC, Mr. Hansen, please.

[Colin Hansen, President and Chief Executive Officer, AdvantageBC]

Thank you very much, Mr. Chair.

First of all, just to give you a quick description of AdvantageBC, we're an organization that has history going back to 1986, formerly known as the International Financial Centre, Vancouver. At that time there were two international financial centres established, one in Vancouver and one in Montreal, and the goal was to promote international financial activity to locate in those centres. Actually, if you look back a number of years ago, in 2008 Vancouver was ranked number 33 as a world financial centre. We set a goal, as the Government of British Columbia, to have that in the top 25 two years after the Olympics, in 2012. In fact, we hit number 17 that year, and in 2014 we actually came in at number 14, which I'll talk about a bit later in the presentation.

British Columbia has been a leader in promoting the use of the renminbi in North America. In fact, in November 2013, the Province of British Columbia became the first non-China government to issue a dim sum bond in the amount of 2.5 billion renminbi, and a year later in November of last year a second renminbi bond in the order or 3 billion renminbi was issued by the province. Interestingly, the only other government jurisdiction to have issued a dim sum bond was the U.K. in October of last year.

So, if you go back a year ago when people first started talking publicly about the prospect of Canada becoming a renminbi settlement hub, there was discussion in the media about how this could shape up to be an aggressive competition between Vancouver and Toronto as to where this hub should be located. It was actually our finance minister, Mike de Jong, who started to promote the idea of a pan-Canadian hub, one that wasn't there to be centred in any one particular city but in fact could serve Canada from coast to coast because, in fact, a renminbi settlement hub is not an address. It's not a building. It's a facilitation that really can be accessed from anywhere in the country, and in this case, because we're the only game in North America, anywhere in the Americas.

So our finance minister asked AdvantageBC to lead the private sector push to have Canada designated, and we worked very closely with the Toronto Financial Services Alliance to jointly promote Canada to have this designation. A working group was set up under my chairmanship in British Columbia and we built the case for how Vancouver could complement Toronto and the other centres in Canada to really make something that is greater than the whole of its parts.

What we find is that different centres in Canada have different strengths when it comes to renminbi settlement. Vancouver is known for trade finance. Calgary is known for inbound foreign direct investment into the western resources industries and Montreal is known for derivatives.Toronto is known for a broad range of other activities. But they complement each other very nicely.

In terms of Vancouver, not only do we have the strength in terms of trade finance but we also have the advantage of time zone. I think when you start looking at that 24-hour clock of commerce around the world, where renminbi trading is going to carry on 24-7, you have the end of the business day in Asia overlapping with a business day in Europe. But then there was a big gap as the Americas did not have that facilitation. So Toronto and Montreal overlap with the end of the business day in Europe, and the west coast overlaps with the start of the business day in Asia. You can wind up with that continuous service of renminbi settlement in real time by taking full advantage of the Canadian time zones that we have to fill that big gap that had existed in the world.

Canada has big strengths that we bring to the table in this file. We have the number one banking system in the world seven years running, according to the World Economic Forum. We have four cities in the top 30 in the rankings of global financial centres. We have Toronto ranked at number 11, Vancouver at 14, Montreal ranked number 18, and Calgary at number 27. I think we as Canadians don't recognize the strengths we have. I do.

I think the November 18 announcement was very important in a couple of respects. First of all, the People's Bank of China designated this settlement hub, the Canadian hub, as not just for Canada but they actually explicitly said that it was there to serve North America. In fact, we can serve all of the Americas through our Canadian financial institutions because we know there are no others in the pipeline that could establish settlement hubs elsewhere in the Americas any time soon.

The RQFII allocation is also important. It's an opportunity for us to service the Americas and to allow access for direct foreign investment into China using onshore renminbi through the RQFII allocation.

The bottom line, I think, is that Canada has a great story to tell when it comes to our international financial institutions. Being designated as the renminbi settlement hub for the Americas is a real opportunity. I think Canadian governments—federal and provincial—and the private sector have to be very proactive in reaching out and seizing that opportunity while it is before us.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hansen.

We'll now go to Mr. Osmar from RBC.

[Bryan Osmar, Managing Director, Head of Market Infrastructure, Royal Bank of Canada]

Thank you, Mr. Chair, and members of the committee. I appreciate the opportunity to appear before you this morning and I look forward to responding to your questions.

My name is Bryan Osmar. I am the managing director of market infrastructure for RBC Capital Markets in Toronto.

Our capital markets business within RBC currently operates in 15 countries with over 6,900 employees located across the globe. RBC has taken a leadership role in promoting the use of RMB-denominated products in a Canadian context.

As this committee heard last week, there have been two Canadian issuers of RMB bonds, also known as dim sum bonds. RBC led the $100 million RMB transaction by EDC, the first for a Canadian issuer, and participated in the Province of British Columbia transactions that raised 2.5 billion RMB in the first issue, and as was mentioned a moment ago, 3 billion RMB in the second offering.

In light of our interest in the RMB market, we've been an active participant in industry efforts to create an RMB hub in Canada. In this regard, I would like to take this opportunity to note our appreciation for the efforts of private sector firms and associations, the provincial government officials and agencies, and in particular the Canadian government, including the Prime Minister, the Bank of Canada, and the Department of Finance, in moving ahead with this initiative.

This partnership between the private sector and the government has been critical to the success of creating an RMB hub for Canada. Once it is fully operational, there are expected to be a number of benefits associated with the Canadian RMB hub.

There will be improved trade flows. Our expectation is that a Canadian hub will help to strengthen commercial and financial ties with China. There will be improved investment opportunities. The new 50 billion RMB RQFII quota under the investment program will facilitate the ability of Canadians to invest in RMB-denominated products and pursue opportunities in Chinese capital markets. Improved efficiency in payments allowing for direct conversion to RMB will expedite the processing of payments and should help to broaden the offshore RMB liquidity pool. Canada may also benefit, as was mentioned, as a first mover by developing the offshore RMB market in this time zone throughout the Americas.

While significant work has already been completed, this initiative is still in its early stages. As this committee heard last week, the clearing bank for Canada, ICBC, is planning to become operational with the first phase of its renminbi clearing operation in the coming weeks.

An important consideration for the Canadian RMB hub and for RMB internationally is that this market is still in its infancy. As experience grows, the market will become more sophisticated, ideally moving to the point where business and financial institutions can more fully engage in RMB markets in the same way they participate in deeper markets such as those in the euro and the yen.

As mentioned earlier, at RBC we are actively engaged in providing a wide range of products and services in RMB in order to meet our clients' needs. We look forward to taking advantage of the benefits of the new Canadian RMB hub as it becomes more fully operational over time.

With that, I would be happy to answer any questions you have.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Ms. Sun from the China Construction Bank.

[Nianbei Sun, Principal Officer and General Manager, Toronto Branch, China Construction Bank]

Hello, everyone. Today I'm very pleased to take part in this meeting and share my point of view about the RMB hub with members of the finance committee and also with all the experts from related industries.

Today I would like to talk about the following aspects of the RMB hub and RMB market.

The first is about who we are.

Let me give you a brief introduction to CCB. China Construction Bank is one of the leading commercial banks in China and also the second largest bank by assets of U.S. dollars—$2.7 trillion U.S., as of September 2014. CCB Toronto is the first Chinese branch in Canada, which means we are the home bank of China Construction Bank.

We were granted certain awards by several organizations, including recognition by The Banker that we are the second by tier 1 capital among the top 1,000 world banks.

The second topic is offshore RMB markets.

The Bank of Canada and the People's Bank of China—our central bank—have already signed a deal of $30 billion Canadian in a bilateral currency swap agreement. Meanwhile, China also provided Canadian institutional investors with 50 billion yuan. We call this the RQFII quota.

The offshore RMB market can be developed through various channels. The first one is the swap agreement. The first swap agreement was signed with the Bank of Korea, for the amount of 180 billion RMB. Since then, China's central bank has dealt with 33 central banks in the world, including those of Hong Kong, Australia, and the U.K., and as of October 2014 the total swap amount is around 3 trillion RMB.

The second channel is the RQFII. The first RQFII were awarded to nine Hong Kong banks. To date, 117 institutional investors in France, Hong Kong, Korea, Singapore, and the U.K. are taking advantage of the RQFII.

The last channel is the RMB clearings. The first clearing centre was announced on November 4, 2011, in Hong Kong. There are currently 11 RMB clearing centres, including Toronto.

The slide I am displaying shows that the RMB market has helped bring consistent growth in the bilateral RMB trading. For example, since the establishment of the RMB centre in the U.K. in 2013, the trade volume has increased significantly, from $370 billion U.S. to $1,473 billion U.S.

The third topic is about benefits to Canada.

Establishing the first North American offshore RMB centre in Toronto provided a significant jolt in promoting Toronto as one of the larger world financial centres. The benefits include: first, reducing the current exchange cost; second, promoting the diversification of Canadian capital markets; and third, the enhancement of the competitiveness of Canadian financial markets.

[The Chair, Conservative, James Rajotte]

Take just one more minute, please. There is just one minute remaining.

[Nianbei Sun]

Okay.

The last topic is about how CCB Toronto can help.

We can help in many ways, including asset management, liability management, clearing and settlement, and treasury management.

In 2014, we were the second in RMB clearing service by volume in the industry. We also issued several dim sum bonds in the financial centres with a total amount of 7.2 billion.

This slide is about our team at CCB Toronto. We all work together to provide local corporations and individuals with more optimized RMB products and service.

Thank you for your time.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now go to the City of London Corporation, to Mr. Boleat, please.

[Mark Boleat, Chairman, Policy and Resources Committee, City of London Corporation]

Thank you, Chairman. I'm very pleased to be able to give this brief presentation.

I'm up early. I'm the chairman of the City of London's policy and resources committee. The City of London is the local authority for the Square Mile. We do many other things as well. My role is the nearest we have to being the political leader.

Being chair of the City of London RMB initiative is one of my central roles, and I've been actively involved in the initiative since shortly after its establishment. The initiative was formally launched in 2012, although there had been discussion of it previously through the economic and financial dialogue between the United Kingdom and the Chinese governments in 2011, when it was agreed that supporting the internationalization of the RMB would bring mutual benefits in trade and the global development of financial services.

The City of London has been uniquely placed to serve as the secretariat for the initiative. We have a long track record of engagement with China. We have offices in Beijing and Shanghai and we have very strong links with the banks and other financial institutions in London. We are not a government body and we're not a commercial body, so we've been very acceptable to all parties to lead the initiative. We are neutral as far as commercial and political goals are concerned, and by chairing the initiative we have allowed the participants to concentrate on finding practical solutions to developing efficient services.

The initiative is currently made up of 13 global banks, including the five major Chinese banks established in the United Kingdom. It has official support in the form of observers from the treasury and from the Bank of England. We limit membership only to keep the initiative to a manageable size, but we engage a wide range of other stakeholders in other ways.

The main activities that we have supported can be split into three complementary categories. First is ensuring the correct clearing and settlement infrastructure exists for RMB business to be carried out efficiently and effectively. London is, by a long way, the largest international foreign exchange centre, and therefore, London has been well equipped to take on this additional role. That role has been enhanced through the establishment of a swap line between the Bank of England and the People's Bank of China, and also by the appointment of the China Construction Bank as a clearing bank. Both these moves confirm the official support for the development of the market in London and help to underwrite liquidity in the market.

Second, the initiative has supported industry participants by creating the right opportunity and environment to develop market products and services. This has covered the work we did in analyzing the products and services being used in other centres, in bringing together the very different players in the market, and in discussing with corporates what their wants were, as well as looking at trends in the world in relevant markets and identifying any barriers to the market developing, and opportunities to help the market develop more efficiently.

Finally, we've been involved in education and marketing. It's been important to highlight the relevance of the market in London to corporates. Some corporates just find it a bit too easy to continue trading in U.S. dollars, as they've always done, so we've had quite a big program of work in communicating to corporates the benefit of trading in RMB, and that's been quite an important part of my own personal role.

We've also produced data using Bourse Consult, demonstrating the growth of the market, and that's been very helpful to all the participants.

All of these activities are aimed at building the end goal of a sustainable RMB market that operates effectively and creates the right environment to enable financial institutions to meet the needs of corporates. We want to see the RMB treated as another currency for doing business alongside the long-established currencies of the dollar, the euro, and sterling. To achieve this we need ongoing and effective dialogue with the Chinese authorities, not only on the RMB but on wider financial sector liberalization and reform in general; commitment from industry; and the efforts of stakeholders such as the City of London to raise awareness, to monitor developments, and to react to new developments.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation. Mr. Boleat, I understand you have about an hour with us here this morning. You do have an appointment to get to.

[Mark Boleat]

I do indeed.

[The Chair, Conservative, James Rajotte]

Thank you so much.

[Mark Boleat]

I think I'm okay for 40 minutes.

[The Chair, Conservative, James Rajotte]

Okay. I want to highlight that for members.

We'll go to members' questions. We'll do the first four members at seven minutes, and then we'll go to five-minute rounds.

We'll start with Mr. Cullen, please.

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

Thank you, Chair.

Thank you to all our witnesses and to Mr. Boleat for being here from overseas.

First things first, Mr. Curtis, there will be no talk of the view from Spanish Banks this morning, as we're in Ottawa today and just the idea of being down there chills me even more.

Welcome to Mr. Hansen from British Columbia.

I'll start with you, Mr. Boleat, since your time is short. You are a few years out in front of Canada with respect to the creation of your RMB trading hub. Is there anything particular, in your experience, that you would advise Canada about in setting up our own in a friendly, competitive kind of way?

[Mark Boleat]

I'm sure it should be friendly and competitive, but indeed, we welcome the development of RMB trading around the world.

I suppose the one thing that's a bit different from other markets in dealing with China is that symbolism is quite important. The establishment of a clearing bank and the swap line have attracted a great deal of publicity, and they have undoubtedly helped to accelerate the market. But if we were doing this in Britain, we would tend to leave a lot of these things to the market.

I think that in working with China it's very important to recognize that concrete actions, announcements, and decisions all help to create the right sort of atmosphere.

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

That's interesting. I want to explore that but my time is limited. Do North American firms trade right now through the RMB hub in London? Do they clear their accounts?

[Mark Boleat]

They do indeed. We have a number of the North American banks involved in the initiative. They will trade everywhere that it suits them. They're certainly fully involved in our initiative, and they played a very major part in it.

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

Thank you for that.

Mr. Hansen, you talked about the competitive advantage with respect to Canada having this. In other testimony, we've heard that the predominance of the advantages for the financial sector is that they will be doing transactions, and because this is two continents wide, this could be a clearinghouse for all North and South American firms seeking to clear in RMB. Is that right?

[Colin Hansen]

Absolutely, and given the fact that we've been explicitly designated as the settlement hub for North America, I think it signals that China is not anxious to establish a similar kind of agency in North America. There is no indication we've heard of that there are any discussions under way vis-à-vis South America.

When you think about where the currency settlement operations take place, some of that obviously comes through New York, but I think what China is trying to do is establish their own place as a global currency. For a lot of the others, if it's not coming through New York currently, it's typically going through Hong Kong, and when you think about it, that's a different calendar day for a settlement.

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

Let me square this, because that's been well understood by the committee, yet there's also been the perception that Canadian small and medium-sized businesses will have a distinct advantage over—potentially—an American or South American counterpart. If it's equal access, if a mining company in the States can clear out their RMB through Canada equal to a Canadian company, I'm trying to square where the advantage is on the Canadian side of things, not for the financial sector but for the business looking to clear.

[Colin Hansen]

I think there are two answers for that. First of all, I think you're correct, in that it would be an advantage for non-Canadian firms as well—