Chinese officials are engaged with global settlement services provider CLS Bank regarding the physical settlement of renminbi-denominated transactions, setting the scene for another major step in the currency's liberalisation.
A deal to add the renminbi to the CLS system would cut settlement risk and come as a further boost to global trading volumes following the International Monetary Fund's decision to add the Chinese unit to its basket of global reserves.
Sources say an agreement is far from certain, however, as Chinese officials weigh up the benefits of a global service over a new, China-centric platform.
CLS Bank - a decentralised conglomerate of banks that provides physical settlement of 18 currencies globally - is planning to organise a market forum in February 2016 in Beijing or Shanghai to educate Chinese government officials on the benefits of using the group to reduce settlement risk in currency transactions. "CLS is in active and constructive conversation with the People's Bank of China and the Chinese authorities," said a CLS spokesperson.
"Our role is to facilitate the process for the orderly introduction of currencies to the CLS system working with entities including central banks, regulators and our members."
The process of making renminbi transactions available for physical settlement could take up to three or more years, according to market participants. But the engagement of the PBoC on the issue is seen as a positive for the continued modernisation and liberalisation of the currency.
"Mitigating settlement risk for renminbi transactions will be a major stepping-stone in the development and usage of the currency world-wide, whether through CLS or any other mechanism that China should choose to utilise," said Darryl Hooker, co-head of EBS Brokertec Markets at ICAP, the largest platform for renminbi-denominated transactions outside China.
"The elimination of settlement risk will allow the entrance of a host of additional market participants and create a structure by which the currency can be more freely accessed and traded - an important development in the globalisation of the currency."
The confidence afforded by China's engagement is partly clouded by the political nature of any decision to link up to a global settlement provider. Participants note that China is concerned about handing control to external participants and is mulling plans to go it alone. The China International Payment Platform, a cross-border renminbi payment system that went live in October, could represent the early foundation of a China-centric settlement system.