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October 15, 2013 10:24 pm
A showpiece agreement giving British investors direct access to Chinese markets is intended to cement London’s role as the western hub for the fast-growing offshore trade in the renminbi. However, market participants suggest the deal will initially be more about symbolism than substance.
China has granted UK-based institutions an Rmb80bn (£8.2bn) quota to invest in Chinese securities, in an expansion of the Rmb270bn Renminbi Qualified Financial Institutional Investor programme, which is at present running only in Hong Kong.
The agreement reflects China’s resolve to promote international use of the currency and follows a Rmb300bn swap agreement signed last week with the European Central Bank – suggesting Beijing is keen to avoid backing a favourite in the race to win a lucrative market.
Trade in the offshore version of China’s currency has more than doubled in the past year, driven by corporate use for trade settlement, as well as speculation on the renminbi’s value.
But it is less clear whether investors will apply to the RFQII. Of the existing quota for Hong Kong, less than 50 per cent has been granted to just 42 institutions, reflecting a lengthy licensing process and restrictions on asset allocation that have only recently been relaxed.
“When people are bullish on China, there are plenty of ways you can express it,” said Paul Bakunowicz, an emerging markets currency trader at Citigroup in London. “There are so many exchange traded funds. You can have a proxy trade and five minutes later, if you don’t like it, you can get out.”
“Interest [in RFQII] won’t happen overnight,” said Alexandra Gropp, regional head for the currency at Standard Chartered. She noted that deposits held in London totalled only some Rmb5bn, mostly interbank or corporate, compared with about Rmb80bn in Taiwan, Rmb140bn in Singapore and Rmb700bn in Hong Kong. Moreover, UK based asset managers could already apply to use the scheme in Hong Kong, she said.
Nonetheless, the political symbolism of the UK-China agreement is important.
London, which has a 41 per cent share of global foreign exchange trading, already handles more than 60 per cent of the offshore renminbi trade outside greater China. This is only half the volume handled in Hong Kong – and traders say liquidity is much higher during the London morning when Asian markets are still open – but it is well-placed to increase its share, as China takes further steps to liberalise capital markets.
Traders think the next move from Beijing may be a widening of the band in which the onshore renminbi is allowed to trade, resulting in greater volatility and higher trading volumes.
“London has a good opportunity to act as a bridge between east and west . . . it will increasingly need a proper infrastructure backed by liquidity to cater for increased volumes,” Ms Gropp said. “It’s important to signal to China at the highest level that there is a commitment for London.”
The RQFII scheme has led to a range of product launches in Hong Kong, including exchange traded funds, which offer direct access to mainland markets for retail investors.
In July this year, HSBC became the first big international bank to win its own RQFII license, which it said it plans to use to create fixed income products.
David Pavitt, head of emerging markets foreign exchange trading at HSBC, said China’s aim now would be to pilot the scheme in a foreign financial centre on a relatively small scale, then increase both the quota and those eligible for it.
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