Chinese Commodity Exchange Uses Digital Yuan to Pay Storage Fees

Letter From Shanghai No 738 – Blending e-CNY and the HKEX A50

This week we feature a guest post from John Browning, founding partner of Hong Kong commodity and financial futures broker BANDS Financial. In reporting on the state of and statistics on the Chinese economy, Browning follows the development by the People’s Bank of China (PBOC) of e-CNY, its digital yuan*. We last wrote about it here.  

Dalian Commodity Exchange Pays with e-CNY

It was a small news item but at the intersection of two of my interests. The China Securities Journal has reported that “The e-CNY has been used by the Dalian Commodity Exchange (DCE) for the payment of storage fees to a delivery warehouse, assisted by the local branches of Bank of Communications and Bank of China.”

It is not of course saying it is paying initial margin or variation margin to the DCE, via digital RMB balances, as these payment channels are broad and currently set in stone. But the further comment by state broadcaster CCTV gets to the heart of the issue:

“Compared with traditional bank transfers, paying such a fee with the digital yuan has certain advantages, including the absence of commission charges and real-time updates on receipt. Also, users don’t face the operating time constraints of large payment systems.”

That is to say, you don’t need to pass the cash through a bank at all. A company such as ourselves holding RMB in its e-CNY digital wallet could pay its bills in China directly, in real-time, to whomever, without the RMB flowing through a series of bank transfers.

Starting in 2019 the PBOC has led a series of real-life trials in the use of e-CNY wallets for transport, retail shopping, online shopping and cross-border transactions from Hong Kong to Shenzhen. But it would now seem we are on the cusp of a new set of experiments involving the big beasts of the financial infrastructure, the commodity and the stock exchanges.

Will the Hong Kong Exchange be Next?

While we are discussing huge technical changes, I should mention the imminent launch of the MSCI A50 Connect Index futures contract which will go live on HKEX on the 18th of October. Here I quote MSCI:

“By selecting 50 of the largest China A-shares investable through the Stock Connect and ensuring diversified sector allocation and balanced representation of the broader China A market. It is designed to enable international and domestic investors to track China’s sector leaders, get exposure to leading stocks in key sectors, and serve as the basis for index-linked ETFs and ETNs and other financial products.”

The Stock Connect channel facilitating north and southbound equity investment is well established in Hong Kong printing new records in the first quarter of 2021. The China Securities Regulatory Commission (CSRC) has given its blessing to the new futures contract saying that the move “will help enrich the risk management tools for foreign investors to invest in A-shares, further attract overseas long-term funds to allocate A shares, and consolidate and maintain Hong Kong’s status as an international financial centre.”

Singapore has its own A-shares index based on the FTSE China index, but the new HKEX version linked to the Stock Connect mechanism will allow users to fine-tune and hedge Stock Connect exposures therefore the HKEX A50 future will have obvious advantages.

However, the new contract is denominated in USD, and as Hong Kong is the largest pool of offshore RMB deposits, it can only be a matter of time when a CNH (offshore RMB) version is launched. Beyond that, reading the China Securities Journal, the day when you pay those balances using an e-CNY wallet is drawing closer.

– John Browning

* It helps to understand the nuances of Chinese currency, which has three currency symbols. RMB stands for Renminbi, the official currency of China. CNY is Chinese Yuan Renminbi, the money used on the Chinese mainland. CNH denotes the Chinese Yuan Renminbi used for exchange outside of the mainland.