The Sing dollar will be added to the China Foreign Exchange Trade System (CFETS) platform, which currently offers transactions between the yuan and 10 foreign currencies. The announcement came on Monday (Oct 27), after an agreement at the Joint Council for Bilateral Cooperation (JCBC) in Suzhou, co-chaired by Deputy Prime Minister Teo Chee Hean and Chinese Vice Premier Zhang Gaoli.
Previously, companies that wanted to convert a large amount of Sing dollars to renminbi (RMB) or vice versa had to do so via an intermediate currency such as the US dollar.
"This will lower foreign exchange transaction costs and encourage greater use of the two currencies in cross-border trade and investments," the Monetary Authority of Singapore (MAS) said in a news release on Monday.
DPM Teo called this is a "major and significant" development which will reduce the cost of doing business and make it more convenient.
Last year, China was Singapore's biggest trading partner, while the city-state was China's top foreign investor. Mr Teo also noted that Singapore is a major RMB hub for the internationalisation of the Chinese currency.
"I still remember my first visit to China 30 years ago, the currency was not even unified then. We had foreign exchange certificates, and you know, it was just not tradeable at all. And today we have direct trade between the renminbi and the Sing dollar, and that's quite a major and a significant development," DPM Teo said.
DIRECT CURRENCY TRADING 'KEENLY ANTICIPATED'
The move comes amid recent efforts by the private sector to forge closer collaboration between Singapore and London - two key offshore RMB centres. For instance, a private sector-led UK-Singapore Financial Dialogue will take place in Singapore in January next year.
Said Mr Suan Teck Kin, Senior Economist at UOB: "If European businesses need to settle whatever that they need to during the Asian time zone, Singapore will be one of the places they can go to. So, the more connections that you have, the more liquidity you can generate, for example. It is kind of like a water pool. If you have more pipes to different pools, that means you can establish a larger volume of RMB liquidity."
Industry players, such as Standard Chartered Bank, say the commencement of direct RMB-Sing dollar trading had been "keenly anticipated" and the move should boost the appeal of offshore RMB in the region, as well as strengthen Singapore's position as a leading offshore RMB hub.
"This is one thing which the market has been keenly anticipating and waiting for, which is direct trading between the Chinese yuan and the Sing dollar," said Mr Motasim Iqbal, head of Transaction Banking Singapore at Standard Chartered Bank.
"With the amount of foreign exchange involved and the amount of foreign exchange risk that is also involved with it, the ability to quote pricing - both in Sing dollars and RMB - will definitely bring in a lot more pricing transparency, so the market is clearly looking forward to it. With Singapore's position as the largest foreign exchange trading centre in Asia, I think this is something which will definitely benefit the entire corporate space."
"Having the ability to directly convert the two currencies complements the city-state's existing capabilities, laying an even stronger foundation for Singapore to nurture a Sing-Yuan market," StanChart added in a statement. "This move will also bring about enormous potential for the development and innovation of financial products and instruments."
United Overseas Bank (China) - which has been approved by China's central bank as a market maker for direct trading between the RMB and Sing dollar - said the direct trading will encourage more companies in Singapore to adopt the RMB for trade settlement.
"Customers stand to benefit most from the direct trading facility as they can expect lower FX conversion costs as well as faster payments and receipts for their transactions," said Mr Eric Lian, President and CEO of UOB (China).
Besides UOB, OCBC and DBS Group were also appointed market makers for direct trading between the Sing dollar and RMB.
MAS also announced that Singapore proposed to allow China-incorporated financial institutions to issue RMB-denominated debt instruments in Singapore directly. "This will help to diversify long-term funding for Chinese financial institutions by allowing them to tap into the international institutional investor base in Singapore," MAS said.
Both countries also agreed to strengthen cooperation in the areas of capital markets and insurance. MAS and the China Securities Regulatory Commission will study measures to enhance collaboration between the derivatives markets of Singapore and China. MAS and the China Insurance Regulatory Commission will also explore collaborative initiatives in the area of catastrophe risk insurance.
MAS Deputy Managing Director Jacqueline Loh said: "The successful implementation of the financial cooperation initiatives and the new areas of cooperation agreed at the 11th JCBC meeting bear testament to the excellent relations between MAS and its counterparts in China. As China proceeds with its structural transformation and financial reform, financial cooperation between the two countries will grow in importance and mutual benefit."