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February 22, 2013 7:20 pm
The Bank of England has long had the right to hand out as many British bank notes as it sees fit. But Threadneedle Street may soon be able to dish out China’s currency as well.
The UK’s central bank said on Friday it was on the verge of signing an agreement with its counterpart, the People’s Bank of China, which would allow it to lend a limited amount of renminbi to British lenders. In return, the PBOC would be allowed to print pounds.
The deal is designed to spur trade and investment between the two countries and solidify the City of London’s reputation as an offshore trading hub for the Chinese currency.
George Osborne, chancellor, said the so-called “swap line” agreement was “another sign that, in the global race, Britain is seen as open for business by emerging and established markets alike”.
Promoting London as a centre for renminbi trading has been a pet project of the chancellor since his visit to Hong Kong in January last year.
Trade with China is expected to boom in the coming years if Beijing opens up China’s capital accounts and allows its currency to be freely traded. The City of London, faced with a crackdown on bank regulation and bonuses, is looking towards growing its nascent renminbi trade as a way of showing the world that it is still a force to be reckoned with.
The reality is that trade in the renminbi is still a tiny slice of the $4tn that changes hands each day in the global currency market. The US dollar, the euro, the Japanese yen and the UK pound are all far more widely traded, while the renminbi, which is tightly controlled by the Chinese authorities, accounts for just 1 per cent.
Privately, many bankers think that the renminbi will come to London whether Mr Osborne claims the glory or not. London is the global hub for currency trading, in part owing to its central geographical location in a 24-hour market. The city accounts for 37 per cent of daily trades, with New York’s 18 per cent putting it in a distant second place.
While Hong Kong is the centre for trading offshore renminbi, London recently overtook Singapore as the second largest centre, according to Swift, the global payments company.
Britain is far from being the only country allowed to hand out renminbi. So far, the central banks of 20 countries have agreed swap lines with the PBOC, including Australia, Brazil, Russia, Hong Kong and Iceland.
Back in the autumn, the BoE was wary of becoming the latest in a long line of central banks to sign up, fearing the move was little more than a public relations exercise for Beijing to show that it was easing the restrictions it places on foreign access to its currency. Bankers complained that they had asked the BoE to provide a swap line to boost confidence in trading the currency and were told that swap lines were for emergencies only.
But the BoE’s resistance appeared to diminish this year. Chris Salmon, the BoE’s chief cashier and whose signature appears on all new UK banknotes, said last month that there was a “perception” that a swap line would boost market confidence, and added that the Bank was ready in principle to agree the move.
Bankers say that, in practice, the swap line will make scant difference to the day-to-day activities of exporters trading with the world’s second largest economy and financiers dealing in the renminbi. The BoE will only offer the renminbi if there is a severe shortage of the Chinese currency; both the central bank and traders consider such an emergency unlikely with plenty of renminbi liquidity swishing around the London markets.
Instead, the swap line is seen as a stamp of authority from the Bank of England for renminbi trading. Bankers have been at pains in recent months to stress to companies the benefits of the renminbi.
Large multinational companies are well aware of the advantages of making payments in renminbi. Banks in London have been trying to raise awareness of the benefits for small and medium-sized business to use the renminbi too. Western Union, the payments company, says that UK companies can get discounts of as high as 3 per cent if they pay their Chinese suppliers in the Chinese currency. That is because Chinese companies will add a charge for the costs of transferring dollar payments back into renminbi.
“There’s been a massive effort by the banks to make sure they’re ready for when the customers come calling,” said Giles Page, a foreign exchange banker at Citigroup in London.
“This is another message to the international community that London remains extremely relevant and open to business.”
Additional reporting by Hannah Kuchler
People still turn to dollars during financial turmoil
If the Bank of England signs up to a swap-line agreement with the People’s Bank of China, it will be the 21st central bank to do so, write Claire Jones in London and Josh Noble in Hong Kong .
The first of the China’s swap lines was set up with Belarus in March 2009 to signal Beijing’s intent on opening up access to the renminbi to international investors. China hopes the renminbi will eventually join the dollar and euro as a global reserve currency.
So far the PBoC has allowed central banks to hand out up to Rmb1.87tn (£197bn). But besides the Hong Kong Monetary Authority, which monitors the world’s largest offshore renminbi market, no other country that has agreed the deal has yet used any of the renminbi on offer.
The agreements shore up confidence that investors will be able to access renminbi in emergencies. But there is not yet the same demand for renminbi outside China that there is for currencies, such as the dollar, during bouts of financial turmoil. At the height of the crisis, the US Federal Reserve set up dollar swap lines with 14 central banks around the globe. Ten of the central banks used the lines to hand out dollars to their banks.
The internationalisation of the renminbi has just kicked up a gear. Taiwan recently became the second offshore trading centre that can clear transactions in the Chinese currency and is expected to launch its own renminbi-denominated bonds – known as Formosa bonds – in the coming days.
This month, Beijing picked Industrial & Commercial Bank of China to act as sole clearing bank to handle offshore renminbi transactions in Singapore.
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