LONDON Jan 24 The Bank of England is prepared
in principle to become the first G7 central bank to enter into a
foreign exchange swap agreement with China's central bank, to
support offshore trading in the yuan, China's currency.
The bank's Executive Director for Banking Services, Chris
Salmon, told a meeting of senior bankers in London that the move
was aimed at underpinning a developing offshore market in yuan
trade out of London that Britain is keen to encourage.
Officials had always said previously that they were not keen
to enter into such a deal given that the renminbi (yuan) was not
freely exchangeable. But there have been signs that China is
moving to open up trading of its currency and Salmon said the
bank was more interested in helping yuan business to flourish.
It would be the latest in a string of bilateral currency
agreements that China has signed in the past three years to
promote use of the yuan in trade and investment.
"The Bank would welcome the development of the offshore RMB
market just as it would any other legitimate market innovation,
and we would not want to inhibit that outcome inadvertently
through gaps in our operational framework," Salmon told the
London Money Market Association's Executive Committee in the
text of his speech provided by the bank.
"To remove any residual uncertainty about our attitude: the
Bank is ready in principle to agree a swap line with the PBOC
(People's Bank of China), assuming a mutually agreeable format
can be identified."
London launched an offshore yuan currency and bond market to
great fanfare last year and a swap deal would cement its status
as the leading European centre for offshore trade in the Chinese
But bankers had said that the bond side would struggle to
develop unless British and Chinese authorities took steps to
make trading easier.
The need for such measures has become even greater in recent
months as potential investors have been discouraged from buying
yuan bonds by China's slowing economic growth and a slump in
one-year yuan non-deliverable forwards to price in a
"Ultimately, the growth of the market will depend on the
success of market participants in matching incipient demand and
supply for RMB denominated products - just as the original
eurodollar market grew by satisfying a latent private sector
demand for dollar assets in this time zone," Salmon said.
"That said, there is a perception that market confidence
would be boosted if the Bank and the PBOC agreed a swap line."
Issuance of London-listed yuan bonds has been limited to a
handful from the likes of oil major BP and banks HSBC
By comparison, the Hong Kong yuan bond market grew to around
350 billion yuan ($55.7 billion) in a little over two years from
2010, according to Thomson Reuters data.
But industry players say foreign exchange trading out of
London itself looks far better, with daily turnover levels
having risen to up to $900 million, compared with $1.5 billion
in Hong Kong.
Figures from global transaction services organisation SWIFT
also show the UK is the leading centre for offshore yuan trade
outside Asia and has made far more progress in getting companies
to invoice in yuan than the United States, for example.