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Building up to the climax of a speech in London in October, Bao Mingyou, the People’s Bank of China’s chief representative in Europe, told his audience of business leaders his country’s financial sector needed not only to adapt, but to take the lead.
“The process of renminbi liberalisation will be pushed ahead,” he said, before listing a series of financial reforms already undertaken — on renminbi rates and on the issuing of certificates of deposits and lending rates, among others.
Then came the climax. “This is the time for you to be more engaged and you will benefit in the long run,” he finished.
This was no wake-up call for London. Of all the world’s financial centres, London has positioned itself strongly to capitalise on China’s increasing inclination towards financial reform. Just to ram home the message, the red carpet was well and truly rolled out for President Xi Jinping’s state visit to the UK in October.
On top of the requisite trade and investment deals that accompany such trips, China formally applied to become a member of the European Bank for Reconstruction and Development, which the UK welcomed. It also chose London as the first financial centre outside China to issue its sovereign debt.
That move would increase liquidity in London’s renminbi bond market, says City of London policy chairman Mark Boleat, as well as help develop a pricing benchmark and attract other high-rated issuances.
London is fast becoming an outpost of the Chinese financial system. Chinese banks have become agents for renminbi clearing payments in London and a host of Chinese financial houses have taken up membership of the London Stock Exchange. The Agricultural Bank of China has issued green bonds in London.
As UK Treasury official Katharine Braddick said: “The UK financial centre has tremendous influence.”
The competition for Chinese investment in Europe is fierce, says André Loesekrug-Pietri, founder of A Capital, the private equity fund management company. The US had its own red carpet visit from President Xi in September.
European countries need to compete for “the first Rmb bond, the Rmb clearing capital, the listing place for Chinese firms, the best friend of this, the first to officially recognise that, etc,” says Mr Loesekrug-Pietri.
But they must co-ordinate policies, markets and wealth to show the Chinese that Europe is a serious partner, he says.
China has no particular preference among potential global financial partners. All are relevant, as it seeks to develop the renminbi and build its liquidity. The renminbi may have climbed from 20th most used currency three years ago to fourth, overtaking the yen in the process, according to Swift, the payments services provider. But it is still dwarfed in size by the dollar and the euro.
London has inbuilt advantages to benefit from China’s thirst for renminbi business — it straddles time-zones from Asia to the Americas and is the centre of the global foreign exchange market.
Hence, China is expected to extend its FX trading hours for the onshore renminbi to 11pm to overlap with European trading times.
But for China to become the fifth member of the elite Special Drawing Rights basket of currencies and acquire reserve currency status, it has had to persuade global financial markets its reforms are serious and long-lasting.
That persuasion game is far from over. “If they start to slow down on the reform process, people start to lose interest,” says Paul Mackel, who heads emerging markets FX research for HSBC.
Reforms will keep coming. China last month launched a cross-border system for clearing renminbi payments to speed up and clarify a laborious process.
SDR admission is largely symbolic, says Mr Mackel. “It’s a coming of age for the currency, an acknowledgment that the Chinese authorities have done a lot of reform. But it’s probably a quality of assurance to stay on the reform path.”
But it is also a question of confidence. The market clearly took fright at the August 11 policy shift from the PBoC which changed the way it calculates the daily RMB rate-setting band, and resulted in a dramatic fall in the currency.
That has subsequently led the market to give its full attention to the PBoC. Since that marked August depreciation, the renminbi has largely stayed in the same trading band, suggesting the PBoC has been seeking a period of calm while the International Monetary Fund deliberates over China’s SDR application.
Does a positive SDR outcome for China from the IMF presage a resumption of renminbi depreciation?
Many analysts assume the currency will weaken next year. “SDR is not going to stop that,” says Mr Mackel. “A period of calm will be temporary, and if anything we will be going back to the fundamental direction of the exchange rate — and that’s for the currency to weaken against the dollar.”
If China is to get the world to trade more in the renminbi, it may need the market to become used not just to a declining currency but one that moves around more frequently.
One step at a time. The world’s financial markets may be gearing up for a more engaged renminbi, but is not yet ready for a volatile one.