China agrees to London renminbi clearing bank

The UK has stepped up its efforts to attract Chinese investment by agreeing with Beijing to the creation of a renminbi clearing bank in London.

The Bank of England and the People’s Bank of China (PBoC) are to sign an agreement on renminbi clearing and settlement in the UK capital on Monday. A designated clearing bank will be named “soon”, the UK Treasury said on Wednesday.

The change will allow investors to cut the risk from making overseas payments in the Chinese currency. It also burnishes London’s position as the global centre for foreign exchange trading as China’s rise shifts international financial flows.

Historically, economic links between China and Europe have been centred on trade, but as China’s wealth grows, and its authorities move to liberalise currency and capital markets, financial centres in Europe are targeting investment.

The UK is keen to defend its role as the main offshore renminbi trading centre outside Asia but faces competition from Frankfurt and Luxembourg.

According to data from Swift, the banking payments provider, London - which has a 41 per cent share of the global foreign exchange market - already handles more than 60 per cent of renminbi trade outside China. This still amounts to only half the volumes traded in Hong Kong, but London is well-placed to increase its share as financial centres around the world jostle for position.

Until recently, the UK capital has relied on Hong Kong’s infrastructure for clearing offshore trade in the renminbi, an arrangement that means liquidity is much higher during the London morning, when Asian markets are still open.

In December, UK-based Standard Chartered signed an agreement with the Agricultural Bank of China to provide clearing and settlement services in London for the first time, but the new arrangement will have the PBoC’s official approval.

The Treasury’s statement cited George Osborne, UK chancellor, saying: “Of course, other western countries will follow, but London now has the critical mass of infrastructure, helping to put Britain at the front of the global race.”

Spencer Lake, global head of capital financing at HSBC, described the deal as a “positive step” on which the market could build.

Australia is also among the countries hoping its financial services industry will gain from China’s opening of capital markets, which Philip Lowe, deputy governor of the Reserve Bank of Australia, described on Wednesday as having “the potential to create a seismic shift in the international monetary and financial landscape”.

Last month China Construction Bank launched a renminbi clearing service in Sydney while the Bank of China announced a new clearing arrangement in conjunction with the Australian Securities Exchange’s Austroclear system. As with Standard Chartered’s service in London, these arrangements remain unofficial

Swift, which has regularly ranked the renminbi in its top 10 currencies by payment volume in recent months, said on Wednesday that Australia’s renminbi payments had more than doubled in the year to February 2014 and that this volume reflected its use for investment and foreign exchange activities, rather than trade settlement.

The renminbi’s share of trading in the $5tn-a-day foreign exchange spot market has climbed steadily in the last couple of years, with Beijing promoting its use in trade settlement, taking steps to increase foreign investors’ direct access to onshore markets and gradually moving towards a more liberal currency regime.

Although it still represents little more than 1 per cent of the $5tn a day foreign exchange spot market, analysts say that trading volumes rivalled those of much more liquid major currency pairs on recent days when the exchange rate swung sharply on the bank of PBoC interventions.