UK's yuan push may fan London's fortunes
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E-mail Agencies via Shanghai Daily, February 18, 2013
A?bank of England pledge to help London become a global trading center for the yuan has stirred talk of a revival in the city's fortunes, similar to the explosion of the US dollar market in the 1960s and 70s.
In what many bankers saw as a pivotal move, the 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 currency.
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 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, eurozone countries or Japan.
However, in a deliberate push to internationalize 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 US 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 centers such as Frankfurt, Paris and New York.
Swap line
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 organization 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 center in Europe."
Despite the US appetite for Chinese goods, it is Britain that handles the world's biggest share of yuan payments outside China, according to SWIFT, at 28 percent compared with 4 percent handled in the US.
