China and the U.K. will introduce direct trading between the yuan and the British pound, helping London steal a march on Frankfurt and Paris to become Europe’s hub for the Chinese currency.
The two nations also agreed on an 80 billion yuan ($13 billion) quota for financial institutions in London to invest in China’s domestic securities under the Renminbi Qualified Foreign Institutional Investor program, U.K. Chancellor of the Exchequer George Osborne said at a briefing in Beijing today, after meeting Chinese Vice Premier Ma Kai. Osborne said the countries will ensure access to yuan liquidity through additional settlement and clearing agreements in London.
“My ambition is to make sure London is the western hub for yuan business,” Osborne said, adding that the city would work in partnership with Hong Kong. Talks will begin to enable Chinese banks to establish wholesale branches in the U.K. for the first time, allowing them to scale-up their business activies, he added.
The Bank of England was the first in a race among European central banks to establish a currency-swap facility with China when it agreed on a line of 200 billion yuan in June. The European Central Bank signed a 350 billion yuan swap line this month. Hong Kong was the first to host a yuan clearing bank and currently has the largest offshore pool of deposits denominated in the currency.
The yuan has become the ninth most-actively traded in the world, up from 17th in 2010, according to a September report by the Bank for International Settlements. It was also the 12th most-used for global payments in August, according to an estimate this month by Belgium-based financial services firm Society for Worldwide Interbank Financial Telecommunications.
China is seeking a greater role for the yuan in global trade and investment and is opening up its domestic capital markets under the RQFII and Qualified Foreign Institutional Investor programs to achieve that goal. RQFII enables offshore yuan to be invested in China, while QFII quotas allow foreign-currency investments.
The nation’s 25.4 trillion yuan onshore bond market offers greater choice, better liquidity and higher yields than are available in Hong Kong, where there is 253 billion yuan of Dim Sum debt outstanding, according to Bank of China data. Ten-year government bonds yielded 4.07 percent yesterday in Shanghai, compared with 3.67 percent in Hong Kong.
“We want the quota to be used as quickly as possible but licenses have to be issued,” Osborne said, referring to London’s allocation, which is the first outside of Greater China.
The pound will be the fourth major currency to have direct trading links with the yuan, after the greenback, Japan’s yen and Australia’s dollar. Trading between the Australian and Chinese currencies started in April, while yuan-yen trades began in June 2012. Osborne didn’t give a timeframe for pound-yuan trading to commence.
The daily value of yuan trading in London now stands at around $5 billion a day, double the daily volume of some $2.5 billion in 2012, Osborne said, citing data by HSBC Holdings Plc.
China pegged its currency to the U.S. dollar until 2005, and now trades in a managed range against a basket of major currencies, with different rates inside and outside of China. Yuan trade settlement started in Hong Kong in 2009 with four cities in China. The program was extended nationwide last year.
HSBC forecast in March that the currency will be fully convertible within five years and a third of China’s total trade will be settled in yuan by 2015, making it one of the top three global trade settlement currencies by volume.