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London becoming int'l RMB trade hub still a long way off

Xinhua, February 21, 2012

"Offshore trading," "Renminbi" and "China's economic growth" were the words frequently heard at "City Week 2012," a recent international forum on financial services held in London.

During his visit to China in January, British Chancellor of the Exchequer George Osborne pushed forward the development of the offshore RMB market and announced plans to build London into a major international trading center for RMB.

The plan, first launched last September during Chinese Vice Premier Wang Qishan's visit to Britain, is a wise idea, but has a long and complicated course to go.

Bright prospect

With the endless quantitative easing policy of the U.S. government after the breakout of the financial crisis in 2008, investors have suffered a lot from the depreciation of U.S. dollar, hoping the market can reduce dependence on the greenpaper.

Meanwhile, the debt crisis in Europe has made the euro, the world's another major reserve currency, go weak.

"The Renminbi, as a sovereign currency, has the greatest potential to become the third international currency," said Professor Kate Phylaktis from Cass Business School in London.

HSBC Chief Executive Stuart Gulliver predicted RMB will become one of the world's three main reserve currencies within 15-20 years as the U.S. dollar loses its hold with investors.

Noting rapid growth in offshore RMB accounts in Hong Kong since China relaxed controls last year, Gulliver said, "We may be at the verge of a financial revolution."

China's central bank has been working hard to internationalize its currency for a couple of years, implementing pilot schemes to develop RMB markets, signing currency swap agreements with other countries, as well as negotiating overseas loans denominated in RMB.

Li Jiange, Chairman of China International Capital Corporation Limited (CICC), said, "We need to be convertible sooner rather than later. The benefits are obvious. I think we should speed it up."

London, as the largest foreign-exchange trading center in the world, will benefit a lot from RMB trading.

It would allow private banks and wealth managers to invest in the rapidly appreciating Chinese currency on behalf of their clients without needing a physical base in Asia.

British banks and financial service institutions increasingly want to trade in the RMB, seeing this as a rapidly growing market in foreign exchange and bond issuance, said British Treasury officials. As matter of fact, many private banks, including Barclays Wealth, DBS, HSBC Private Bank, OCBC, are already offering RMB products and services.

For Britain, it will give a boost both to business and jobs in the City and to the prestige of London as a global financial center.

In addition, it will bring some comfort to international bankers based in London, many of whom were worried that the Britain's position in the single market -- which they say is the main reason they work in the City -- could be put at risk by Prime Minister David Cameron's decision to veto amendments to the EU treaty.

What may matter most, in a global context, is that this would be seen as a further step on the road towards relaxation of China's control of the RMB value and on capital flows.

Long way to go

Although Osborne, the City and some bank giants have drawn a rosy picture for London to become an international center of RMB trading, the way ahead still remains long and complicated, because some of the problems are difficult to solve in near term.

China and Britain have not signed currency swap agreement, and also a full internationalization of RMB is required.

A full convertibility of RMB will be a gradual and a long process, demanding a mature and developed financial system, which permits open-up to capital inflows and allows domestic investors to send money abroad.

Good news for London is that since 2009, China has been gradually relaxing restrictions on the currency, allowing companies to use RMB to settle cross-border trades and to launch investment products in RMB.

London will work hard to compete with Hong Kong, even with Singapore for the offshore center. If Beijing chooses London, it can not only get the euro-dollar experience, but also 24-hour global currency trading opportunities.

Xia Bin, an adviser to China's central bank, believed in the short term, London could position itself as a preeminent RMB trading hub for Europe.

"In three to five years, if London works hard, it will be the offshore trading hub for European customers, while Hong Kong will service Asian customers," he said.

Though no formal plans have been announced yet, officials have confirmed that China was looking to establish a third offshore RMB clearing bank besides those in Hong Kong and Macao. Having a clearing bank to play the functions of a local offshore central bank is a key prerequisite for starting a deliverable currency market.

The RMB has to be held by other countries as foreign exchange reserves and used by international markets as an investment currency to achieve real internationalization, a process which the RMB has not yet begun. The realization of RMB internationalization will greatly depend on China's economic power, and the U.S. dollar has spent decades to complete the journey.

As the RMB is still not fully convertible, the pool of redback deposits in London is limited. The size or liquidity of the RMB is still quite small, setting limits on how much can be transacted at one time.

RMB offshore center can't be built in one day, but the long and complicated road leads to a bright prospect. The RMB would be on its way to becoming a proper globally-traded currency, commensurate with China's status as the world's second biggest economy.