London is seeking to become a hub for yuan trade and investment in an initiative backed by Bank of China Ltd., Barclays Plc (BARC), Deutsche Bank AG (DBK), HSBC Holdings Plc (HSBA) and Standard Chartered Plc. (STAN)
Institutions in the U.K. capital currently have more than 109 billion yuan ($17 billion) of customer and interbank deposits in the Chinese currency and that is “growing strongly,” according to a policy paper by research firm Bourse Consult released today.
Chancellor of the Exchequer George Osborne pushed the case for London to become an offshore center for yuan trade as closer financial ties with the world’s second-largest economy may help buffer Britain’s economy against the sovereign-debt crisis in Europe. China doubled the yuan’s trading band and allowed banks to hold dollar short positions this week, steps seen as paving the way for a convertible currency.
“London is making a push to become the second offshore yuan market,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This is likely to occur wherever local markets need the offshore yuan business to boost their status. At the same time it will offer China a platform to expand the international use of the currency, preferably in time zones other than its own.”
HSBC’s Dim Sum
The U.K. Treasury and Hong Kong Monetary Authority agreed in January to provide help with a forum for banks to look at clearing and settlement systems, market liquidity and the development of new yuan products. The first meeting will be held in Hong Kong next month.
Authorities in Hong Kong, designated as the major offshore yuan trading hub by China, plan to lengthen yuan payments trading by five hours by June, allowing London-based institutions the opportunity to participate.
London may also see the first yuan bonds sold by a European bank listed on its exchange soon. HSBC, Europe’s biggest bank by market value, is planning to sell three-year so-called Dim Sum bonds listed in the city, according to a person familiar with the matter.
“London is perfectly positioned to act as the western hub,” for the yuan, said Stuart Fraser, who heads the London initiative’s steering committee and is policy chairman of the City of London Corporation, the financial district’s government body. “London has many natural advantages, including time zone, a trusted legal system, a respected regulatory framework, deep pools of liquidity and a strong track record of innovation.”
China is encouraging global use of the yuan and allowing more overseas investors to access its local capital markets as Premier Wen Jiabao seeks to shift the focus of economic growth to domestic demand and away from slowing export industries.
The People’s Bank of China broadened the trading band against the dollar to 1 percent from its daily reference rate, effective April 16, after having held the limit at 0.5 percent since May 2007. The China Securities Regulatory Commission raised quotas for global funds pumping foreign currency into China’s stocks and bonds to $80 billion from $30 billion this month.
Asia’s largest economy will probably expand 8.4 percent this year, from 9.2 in 2011, according to economists’ forecasts compiled by Bloomberg. That compares with predictions of 0.6 percent growth in the U.K. and 2.3 percent for the U.S.
Yuan-denominated deposits in Hong Kong declined to the lowest level since June on increases in remittances to China and as expectations of currency appreciation weakened. Dim Sum bond sales in Hong Kong more than doubled this year to 53.3 billion yuan from a year earlier, according to data compiled by Bloomberg.