China Opens Capital Markets as U.K. Taps Overseas Yuan Business

Photographer: Jerome Favre/Bloomberg
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.

The U.K. joined Hong Kong and Taiwan in being allowed by China to take part in a program allowing offshore yuan to be invested in Chinese securities, a move that bolsters efforts to internationalize the currency.

China approved an 80 billion yuan ($13 billion) quota for investors in London to buy onshore assets under the Renminbi Qualified Foreign Institutional Investor scheme, Chancellor of the Exchequer George Osborne said at a briefing in Beijing yesterday. The deal was part of a series of agreements signed during Osborne’s trip, which include direct trading between the yuan and pound and allowing Chinese lenders to open wholesale-banking branches in the U.K. capital.

People’s Bank of China Governor Zhou Xiaochuan is opening up the nation’s capital markets as he seeks a greater role for the yuan in global trade and investment. Shanghai inaugurated a pilot free-trade zone last month that will allow trials of yuan convertibility under the capital account and permit overseas companies to sell debt denominated in the local currency.

“This is another sign that Governor Zhou has high level support to move forward with efforts to internationalize the yuan as a way to catalyze other reforms such as opening up the capital account,” David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now an emerging-market analyst at TCW Group Inc., said in an interview from Los Angeles yesterday. “Clearly, the establishment and growth of RQFII are the most noticeable changes. This is a direction they want to head in.”

Frankfurt, Paris

China started the program in 2011 as a way to encourage greater worldwide usage of yuan, allowing investors holding the currency overseas to buy domestic bonds, stocks and money-market instruments. Regulators said in July they would expand it beyond Hong Kong and Taiwan to the U.K. and Singapore.

“RMB internationalization clearly is a part of overall strategy of financial reforms, which is high on the agenda,” said Jahangir Aziz, head of emerging Asia economic research at JPMorgan Chase & Co. said in a phone interview from Washington yesterday. “People shouldn’t be surprised by China’s opening up of its financial sector.”

Yesterday’s agreements make the pound the fourth major currency to have direct trading links with the yuan, after the dollar, Japan’s yen and Australia’s dollar, putting London ahead of Frankfurt and Paris in a bid to become Europe’s hub for the Chinese currency.

In June, the Bank of England became the first among European central banks to establish a currency-swap facility with China, supporting yuan users by providing liquidity when needed.

‘Western Hub’

Osborne said yesterday that further agreements on yuan settlement and clearing are planned. 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 activities, Osborne said.

In a Twitter posting yesterday, Osborne said Industrial & Commercial Bank of China Ltd., the world’s biggest bank by market value, will become the first Chinese bank to issue yuan-denominated bonds in London. The Chinese lender will sell bonds next month, according to the post.

“My ambition is to make sure London is the western hub for yuan business,” Osborne said at yesterday’s briefing. “More trade and more investment means more business and more jobs for Britain.”

China’s currency 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.

36% Rally

The yuan touched 6.1007 per dollar yesterday in Shanghai, the strongest since the government unified official and market exchange rates at the end of 1993. The currency has strengthened 36 percent against the dollar and 47 percent versus the pound since a peg to the U.S. currency was scrapped in July 2005.

The daily value of yuan trading in London now stands at about $5 billion a day, double the daily volume in 2012, Osborne said, citing data by HSBC Holdings Plc. HSBC forecast in March that the currency will be fully convertible within five years and that 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.

The nation’s 25.4 trillion yuan onshore bond market offers more 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 data compiled by Bank of China. Ten-year government bonds yielded 4.07 percent in Shanghai yesterday, compared with 3.67 percent in Hong Kong.

To contact Bloomberg News staff for this story:

Henry Sanderson in Beijing at hsanderson@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net

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