On August 10, Deutsche Bank announced its designation as a clearing bank for renminbi transactions. Germany’s leading bank and the dominant private institution in the global foreign exchange market will now be able to provide its European customers with direct access to markets denominated in China’s currency. RMB clearing has been available since 2014 through the local branches of China’s state-owned commercial banks, so renminbi clearing in Europe per se is not new.
DB’s designation is significant, however, for two other reasons. First, the bank’s centrality to the German, European and global financial systems means that RMB services will now be more closely integrated with comprehensive commercial banking services, which could lead to wider offshore usage of the currency. Second, and by the same token, the PBC’s granting clearing bank status to a systemically and politically significant bank, separate from China’s institutional framework, is a milestone in the PE of China’s currency. But any conclusions about the renminbi’s advance at the expense of the dollar should be taken with a grain of salt: the move is speculative for both sides.
More interesting, I think, is to read the event in light of Deutsche Bank’s own history with the dollar. In 1989, DB took over British merchant bank Morgan Grenfell, responding to the imperative to participate in US-based, dollar-denominated money markets, which were then consolidating to become the core of the global financial system. As analyzed by Mareike Beck in her book Extroverted Financialisation, the DMG acquisition was part of a multi-decade strategy, including DB’s designation as a primary dealer by the US Federal Reserve in 1990.
Mechanics of offshore issuance
Deutsche Bank’s China-based subsidiary operates as a bank in China and is regulated there by the PBC and other supervisory agencies. Since 2015, DB (China) has been a member of China’s Cross-Border Interbank Payment Systems (CIPS), the payment rail for renminbi-denominated transactions. With the new designation, the Frankfurt-based parent company DB can issue renminbi-denominated deposits outside China’s regulatory sphere. What has changed?
There is a subtle point here around offshore currency issuance. To paraphrase my favorite theorist of crisis, anyone can create renminbi, the difficulty is getting them accepted onshore. In other words, anyone can accept 100 million euros and promise to deliver 780 million renminbi in return: no authorization from the PBC is required. Since we’re talking about commercial deposits, not banknotes, that person can then transfer those offshore renminbi to someone else as payment. There is no infrastructural reason that this would not work.
But are they real renminbi? The question can only be tested by redemption: if the offshore renminbi can be brought onshore and spent to satisfy an obligation within China, then they are proper offshore renminbi. This strongly constrains the monetary mechanics, and it points to what must be the new arrangement that will allow DB to clear offshore RMB. The T account below represents my understanding. On the left is the People’s Bank of China, the country’s central bank; on the right is the rest of the world, including Deutsche Bank’s customers and everyone else. Between them I show two entities, Deutsche Bank and its China-based subsidiary. DB (China) is a member of CIPS, so at least since 2015, it has held a reserve account at the central bank, denominated in onshore renminbi (CNY).
What is new with the clearing bank designation is DB’s authorization to transact across China’s regulatory perimeter. Mechanically, this happens through cross-border transactions inside the bank’s corporate structure, between its own subsidiaries. Specifically, the Frankfurt headquarters holds a clearing account at its own China-based subsidiary. This is recorded as a nostro (lit. “ours”) asset on the balance sheet of the parent company, and a vostro (“yours”) liability on the balance sheet of the subsidiary. When a customer of the parent wants to use its offshore (CNH) deposits to make payment inside China, the parent instructs the onshore subsidiary to make the payment, and pays for it using the clearing account.
Though DB (Frankfurt) could issue offshore renminbi deposits without any authorization from China’s regulators, it is the clearing deposit with its onshore subsidiary that allows those deposits to be redeemed, and thus turns them into real RMB. Although the subsidiary is economically owned by the Frankfurt parent, it is licensed and regulated to operate as a bank within China’s onshore financial system. The PBC therefore has the power to approve or disapprove its liabilities. Permitting the clearing account is what allows DB to issue CNH.
Will it work?
In other words, Deutsche Bank can now credibly offer par (one-to-one) clearing of renminbi in Europe, just as in the 1990s it gained the power to offer par clearing of dollars.
Beck’s book tells the story of how and why Deutsche built its way into the core of global, dollar-based money markets. The strategy came at a cost: DB had to shed its historical relationship with the Mittelstand and compete with the other global banks. It also brought benefits: DB became a systemically important bank, and so benefited from the Fed’s dollar liquidity support during the 2008 crisis. DB’s cousin Commerzbank, as Beck shows, did not reach the global core, remaining an outsider in New York, and paid the price for it in the crisis. In my own reading: both banks managed to access advantageous funding in the Eurodollar market, but of the two, only Deutsche Bank gained the ability to clear dollars at par for its customers.
Perhaps Deutsche is trying to repeat the strategy, perceiving an emerging global financial order and securing a central and advantageous position. The test: when the fledgling RMB faces its first major liquidity crisis, only the PBC will be able to restore liquidity, just as it had to be the Fed in 2008. When that happens, will DB benefit from that support?