LONDON Feb 13 A Bank of England pledge to help
London become a global trading centre for China's yuan has
stirred talk of a revival in the city's fortunes, similar to the
explosion of the U.S. dollar market in the 1960s and 70s.
In what many bankers saw as a pivotal move, the British
central bank said last month it was ready "in principle" to
adopt a currency swap line with the People's Bank of China,
providing a two-way pipe to the City as the still-unconvertible
yuan starts to emerge as a world reserve
Britain would become the first major developed economy to
install a currency swap line with China, replicating existing
arrangements available for the dominant freely-traded currencies
such as the dollar, euro and Japanese yen.
China has agreed swap lines with more than 15 other
countries but these tend to be emerging economies that have
natural resources or goods used in manufacturing to export. The
list does not include major industrial powers such as the United
States, euro zone countries or Japan.
However, in a deliberate push to internationalise the yuan,
or renminbi, China has been developing an offshore market for
it, as a precursor to allowing global firms, banks and asset
managers access to its domestic market.
China plans to make the yuan basically convertible as early
as 2015 and eventually put it on a par with the U.S. dollar.
Britain's commitment to a swap line with the world's second
biggest economy should boost fledgling trade in the offshore
yuan in London, market watchers say, helping it to see off rival
yuan centres such as Frankfurt, Paris and New York.
A swap line between Britain and China would allow the Bank
of England to supply yuan in exchange for other currencies if
there were a sudden shortage in the London market, enabling a
British company, for example, to pay for Chinese imports.
But if markets function well, there would be no need to use
it. Many of the PBOC's swap lines have not been used.
"I see it as a big signal to all market participants that
the City of London and UK are taking this very seriously," said
John McCormick, chairman of RBS Asia Pacific. "It's as important
as the development of the Eurodollar market 40 years ago."
London positioned itself as a natural hub for global foreign
exchange and money market trading in the 1960s and 1970s, before
the offshore dollar, or Eurodollar, took off as free-floating
currencies replaced the gold standard in 1973.
Boosted further by a combination of market deregulation and
transformation of trading technology in the mid-1980s, known
locally as "Big Bang", London boomed as a home for world
finance, with the number of foreign banks with branches or
offices in the city almost tripling in the 30 years to 1999.
While many fretted a year ago about how far the credit
crisis might undermine London's role, British finance minister
George Osborne launched a campaign to capture yuan business.
But convincing British or other European companies to
invoice in yuan for the goods they sell to China, or to issue
yuan bonds, has not always been easy, market participants say.
The yuan is only the world's 16th currency for payments,
according to global transaction services organisation SWIFT, and
the yuan's position in global reserves is still tiny.
The swap line was top of London bankers' wish lists but
hopes the central bank would grant it had not been high.
"It was a bit of a bolt from the blue," said Andrew Malcolm,
head of capital markets for Asia at law firm Linklaters,
describing the decision as "an opportunity for London to
establish itself as the pre-eminent renminbi centre in Europe."
Despite the U.S. appetite for Chinese goods, it is Britain
that handles the world's biggest share of renminbi payments
outside China and Hong Kong, according to SWIFT, at 28 percent
compared with 4 percent handled in the United States.
London is the world's biggest foreign exchange and bond
trading centre and Britain is hoping for an offshore yuan bond
market to replicate the explosion in such business in Hong Kong,
Asia's main offshore yuan centre.
There have only been a handful of yuan bonds launched in
London, but issuance of offshore yuan, or "dim sum", bonds in
Hong Kong is expected to rise this year by 20 to 30 percent, to
as much as 350 billion yuan ($56 billion) including certificates
of deposit, according to Standard Chartered estimates.
Daily offshore yuan trading in London rose 150 percent in
the year to June 2012, to $1.7 billion, according to a recent
survey by Bourse Consult for the City of London.
However, yuan deposits, recorded as totalling 109 billion
yuan at end-2011, suffered from depreciation of the yuan in
early 2012, and had also been overstated due to misreporting by
some banks. The interbank and corporate deposit total collated
by Bourse Consult shrank to 15 billion yuan in June 2012.
Bankers may now look further down their wish lists and seek
a British sovereign yuan bond.
To spur the market further, Britain could launch a yuan bond
in China, China could issue an offshore yuan bond in London, or
London could settle trades directly, rather than via Hong Kong.
Other Chinese borrowers could also launch more yuan bonds in
London, following a sole Chinese issue last year.