After stock markets closed on Monday, Toronto became the first trading hub in North America for China's currency, known as the renminbi or yuan.
Chinese government dignitaries, Federal Finance Minister Joe Oliver and his Ontario compatriot Charles Sousa attended a ceremony in Toronto Monday evening to formally announce the first conversion from yuan to Canadian dollars.
The announcement makes Toronto the first such trading hub in the Americas that has permission to be a clearinghouse for Chinese renminbi (which means "people's money" in Chinese). There are currently only a handful of such hubs outside China, including Paris, London, Moscow, Singapore, Tokyo, Seoul and Sydney, Australia.
In practical terms, such hubs make it easier to do business with China because without one, Chinese money has to first be converted into a currency like the U.S. dollar before being again converted into loonies to make investments here, or even pay for supplies.
"What the hub does is it provides the potential to get a good price," says David Watt, the chief economist of HSBC. "It sets up a way for Canadian businesses to call their local banker and say "we've got a deal to import Chinese material and we'd like to pay for it in RMB not U.S. dollars."
The hub eventually will allow people on both sides to take out that middle man and convert renminbi directly into Canadian dollars and vice versa.
"It should give Canadian businesses the confidence to increase trade."
No need for middle man
Watt says China is moving faster on full convertibility of the renminbi and could loosen rules further by the end of the year.
The Canadian hub is likely to attract business from Central and South America, as well as the U.S. and Canada, he said in an interview with CBC’s The Exchange with Amanda Lang.
"It does create opportunities for Latin American companies to do some of their trading in renminbi through Toronto as well because it’s the same time zone, active pricing, so you no longer have to worry about market dead zones in trading [with] other countries," Watt said.
It's a huge market that Canadian businesses are eager to be more active in. And the hub could give them a leg up on the billions of dollars that are already flowing between the U.S. and China.
"Bilateral trade between China and the U.S. alone is worth more than $550 billion US per year," director Michael Burt with the Conference Board of Canada said recently. "If even a small share of these transactions pass through Canada, they could generate considerable transaction fees for Canadian financial institutions."
Financial institutions benefit
"Canadian financial institutions may benefit by providing associated services, such as yuan-denominated accounts, and the issuing of yuan-denominated securities."
Australia signed a similar deal to become a yuan trading hub in 2013. The two countries have since signed a free trade deal.
Next to the U.S., China is Canada's second-largest trading partner, but Canada is only China's 21st-largest, with $77 billion in bilateral trade between the two countries last year. Ottawa says trade between Canada and China supports more than 470,000 jobs in Canada a year, which was about 2.67 per cent of total Canadian jobs.
The renminbi has become a major world currency relatively quickly. Roughly a decade ago, it was not widely held outside of China due to strict regulations Beijing imposed on where it could be used. From there, it has grown to be one of the most-traded currencies in the world along with the U.S. dollar, the euro, the yen, the British pound, the Canadian dollar and the Swiss franc.