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Last updated: February 22, 2013 11:10 am
The Bank of England is in discussions to set up a renminbi-sterling currency swap agreement with the People’s Bank of China to spur trade and investment between the two countries.
Mervyn King, governor of the BoE, met Zhou Xiaochuan, governor of the PBoC, on a trip to China on Friday. They agreed to try to sign a swap agreement soon, as the UK looks to establish itself as a leading offshore hub for renminbi trading.
Sir Mervyn said it was a “significant milestone” in the dialogue between the two central banks.
“London is growing rapidly as a centre for RMB business. The establishment of a sterling-renminbi swap line will support UK domestic financial stability,” he said.
The swap would mean that if there were a shortage of renminbi outside China, the BoE would be able to provide liquidity to UK banks, he said. The renminbi is expected to become one of the world’s most commonly traded currencies in the next decade.
The move marks a change of direction for the BoE. Last year, top investment banks in London had asked the BoE to provide a renminbi swap line to shore up confidence among companies and investors who are nervous of trading the renminbi due to liquidity concerns.
The BoE’s previous position has been that it would only arrange a swap line if the financial stability of the UK was at threat. But George Osborne, the chancellor, has been vocal about the need to expand business with China.
Mr Osborne said the agreement “cements London as the western hub for the fast-growing renminbi market”.
“It is another sign that, in the global race, Britain is seen as open for business by emerging and established markets alike,” he said. “We have already seen evidence in 2013 of a significant increase in renminbi trade in London.”
The UK Treasury is trying to promote London – already the global centre for currency trading – as an offshore hub for renminbi trades. At the end of last year, China Construction Bank became the first Chinese bank to issue a renminbi-denominated bond – known as a dim sum bond – in London.
Bankers welcomed the news. “This is a positive step forward in eventually rolling out London as a major offshore RMB centre. The push forward to internationalise the RMB is taking a marked leap forward and this is a part of the broader push by China to open its capital account,” said analysts at HSBC.
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China’s currency is tightly controlled and cannot be traded freely outside its borders. But it has already set up an estimated 20 swap lines with other countries, including Australia, Singapore, Japan, Malaysia and New Zealand as part of its efforts to internationalise its currency.
Under a swap agreement, central banks agree to exchange each other’s currency and can then lend the money to domestic banks to improve liquidity.
The BoE has open swap lines in place with the US Federal Reserve and the European Central Bank.
London is currently the global centre for foreign currency trading, accounting for 37 per cent of all daily trades, with New York in second place accounting for just 18 per cent of global currency trade.
While Hong Kong remains the centre for trading offshore renminbi, London recently overtook Singapore as the second largest centre, according to Swift, the global payments company.
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