Bloomberg News

U.K. Needs a Yuan Swap to Boost Trade, Ex-PBOC Adviser Says

December 06, 2012

U.K. Chancellor of the Exchequer George Osborne

George Osborne, U.K. chancellor of the exchequer. Photographer: Chris Ratcliffe/Bloomberg

The U.K. needs to build closer ties with China’s central bank to unleash London’s potential market in offshore yuan trading, according to a former adviser to the People’s Bank of China.

While Chancellor of the Exchequer George Osborne, who cut Britain’s growth outlook yesterday, is pushing for London to become an offshore center for yuan trading, the U.K. is falling behind other countries in facilitating foreign-exchange flows through currency swap agreements, Xia Bin said at a meeting of the London Advisory Council for China yesterday. Seventeen countries have currency swap agreements with China and the U.K. isn’t one of them, Xia said.

The U.K. “has huge potential for developing this business,” Xia said. “This potential is not unleashed yet.”

Cross-border trading of yuan has expanded four-fold since August 2010 to almost 200 billion yuan ($32 billion) in October this year, Euroclear Bank SA said in a statement yesterday, citing the Hong Kong Monetary Authority’s figures.

UBS AG in London and HSBC Holdings Plc’s Hong Kong branch carried out their first repurchase agreement in yuan by using Euroclear and the Hong Kong Monetary Authority to manage the collateral, Euroclear said in a statement. The repo allows international financial institutions to use securities held with Euroclear as collateral to access liquidity from Hong Kong in yuan and other currencies, according to the statement.

Repo

The repo agreement totaled 60 million yuan ($9.7 million) Paul Gooding, the head of European renminbi business development at HSBC, said in an interview today in London. The next few deals will be of similar size until the trade has been “comfortably standardized,” he said without providing an estimate.

The Bank of England should push to expand the market further by discussing setting up a currency swap agreement with China, Xia said. London is a step behind Hong Kong, which has closer communication with the mainland central bank, he said.

The Bank of England’s position is that if the swap agreement is “necessary, it will certainly consider it,” Mark Boleat, policy chairman of the City of London Corp., which oversees Britain’s main financial district, said at the meeting in London yesterday.

Merck & Co., the Whitehouse Station, New Jersey-based drugmaker was among about 150 companies attending the meeting with U.K. officials yesterday. The company supports the “internationalization of the renminbi,” Ronald Rogers, a spokesman for the company, said in an e-mail after the meeting.

Yuan Debt

London has the capacity to boost issuance of yuan- denominated debt known as Dim Sum bonds, Katherine Tsang, chairwoman for Greater China at Standard Chartered, said at the meeting. Whether the U.K. can boost yuan liquidity depends on having a currency swap line, Tsang said.

The yuan weakened less than 0.1 percent to 6.2282 per dollar as of 9:43 p.m. in Shanghai, China Foreign Exchange Trade System prices show. It has strengthened 19 percent in the past five years, the best performance among 25 emerging-market currencies tracked by Bloomberg. In Hong Kong’s offshore market, the currency traded at 6.2098 from 6.2108 yesterday, according to data compiled by Bloomberg.

Taiwan is making final preparations to become a second offshore yuan center and Singapore is also seeking to become a hub for trading and investment in the currency. China has currency-swap agreements totaling about 1.8 trillion yuan ($289 billion) with countries including Australia, South Korea, Malaysia and Turkey, the Taipei-based Chung-Hua Institution for Economic Research said in a report published on Nov. 20.

Offshore Trading

The potential for growth of the market for offshore yuan trading will depend on the investment climate, according to Wang Jianxi, executive vice president of China Investment Corp.

“If it’s very turbulent, very volatile, a crisis after crisis, it will definitely delay the opening up of China’s domestic market,” he said in an interview at the meeting in London, referring to global market volatility.

The U.K. Treasury’s effort to build a market for yuan transactions drew executives from more than 60 companies and China’s sovereign wealth fund to meetings in London with bankers and regulators yesterday.

“The group realization is that a huge wealth of solutions is available today -- a lot can be done,” Philippe Lintern, regional head of global markets for Europe at Standard Chartered Bank, said in a phone interview after attending yesterday’s meeting. “We are now at a stage in the game where a huge amount of stuff is possible”

To contact the reporter on this story: Maria Levitov in London at mlevitov@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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