London Gains First-Mover Advantage in EU’s Yuan RaceMaria Levitov, Ye Xie and Lyubov Pronina
London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global.
The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks, matching Hong Kong’s swap arrangement, according to Gao Qi, a markets strategist at Royal Bank of Scotland Group Plc in Singapore.
The center of the world’s $4 trillion-a-day market for foreign-exchange trading is expanding ties with the second-biggest economy after yuan-denominated bond sales overseas surged 11-fold to 174 billion yuan since 2009 and trading in the currency more than tripled in London. China started pushing for the greater use of the yuan outside the mainland in 2010.
“We are at the beginning of a massive journey,” Philippe Lintern, co-head of wholesale banking for Europe at Standard Chartered Plc, Britain’s second-largest lender by market value after HSBC Holdings Plc, said in a phone interview from London Feb. 19. “This is probably the most exciting thing that will happen in my entire career. It is a revolution of financial markets.”
The swaps would allow the Bank of England to supply yuan to importers and other users when there’s a shortage of the currency. The “safety net” would have a “very strong psychological effect” in boosting confidence in trading yuan, Lintern said.
Since China started a pilot program allowing the use of yuan to settle international transactions in 2009, the proportion of its trade conducted in yuan has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most used in global trading along with the dollar and euro, HSBC forecast this week in a report.
Yuan-denominated bonds sold by companies, including McDonald’s Corp. and Caterpillar Inc., rose to 174 billion yuan last year from 16 billion in 2009, Bloomberg data show. Standard Chartered and HSBC underwrote 36 percent of so-called Dim Sum bond sales in 2012.
Britain accounts for about 46 percent of global currency trading, according to a Bank for International Settlements study in 2010, dwarfing the U.S. at 24 percent, France at 7 percent and Singapore at 3 percent.
In the offshore yuan market, the U.K. made up 3 percent of the total transactions last year, the third-largest after Hong Kong, with a 73 percent share, and mainland China at 5.2 percent, according to a white paper published by the Society for Worldwide Interbank Financial Telecommunication, or Swift. That compared with 2.6 percent for Singapore, 1.9 percent for the U.S. and 1.4 percent for France.
While China is promoting a broader use of the yuan to match its rising status in the global economy, HSBC economists including Qu Hongbin estimated that it will take time for the yuan to become a dominant currency because the government doesn’t allow it to be freely traded. The People’s Bank of China limits the daily fluctuation of the yuan to 1 percent on either side of a reference rate set by the bank.
Twelve-month non-deliverable forwards were at 6.3035 per dollar as of 12:46 p.m. in New York, according to data compiled by Bloomberg.
While yuan transactions surged 171 percent in January from a year ago, the currency still accounts for less than 1 percent of global payments, compared with about 85 percent combined for the dollar, euro, pound and yen, according to Swift.
Central-bank Governor Zhou Xiaochuan said at a conference in Beijing on Nov. 17 that the bank’s next step in overhauling the foreign-exchange system will focus on convertibility. Outgoing Premier Wen Jiabao pledged to expand cross-border use of the yuan and encourage foreign investment.
“To become a global currency requires full convertibility,” the HSBC economists wrote in their report. “Although this will be done gradually, Beijing policy makers are now more confident than ever about speeding up the process.”
China has signed currency-swap contracts totaling 2.4 trillion yuan since December 2008 with 19 countries and regions, including Hong Kong, Australia, Turkey, Brazil and South Korea, according to data from the People’s Bank of China website.
China is ready to discuss a bilateral currency swap with Taiwan, Yi Gang, a deputy governor at the PBOC, said at a briefing in Beijing today. The development of offshore yuan centers will be based on market needs and competition, he said.
Bank of England Governor Mervyn King and his Chinese counterpart Zhou met in Beijing last month and plan to sign a yuan-sterling swap shortly, the U.K. central bank said in a Feb. 22 statement. The efforts show the U.K. central bank’s commitment to the growing yuan market as other European cities vie for the business, Paul Gooding, HSBC’s head of European RMB business development, said in an interview from London on Feb 19. Bank of England officials declined to comment.
“Perhaps there’s a first-mover advantage,” Gerard Lyons, the chief economic adviser to London Mayor Boris Johnson, said in a March 8 phone interview. “It’s a case of recognizing how the world is changing and how London needs to position itself. The offshore Chinese currency market has the potential to be incredibly big.”
Other financial centers are lining up to compete.
Paris has “all the conditions to become the renminbi offshore center of the euro zone,” Banque de France Governor Christian Noyer said in an October, according to a presentation by Paris Europlace, a financial industry association.
No one at the Banque de France was available to comment, Corinne Dromer, a spokeswoman, said by e-mail on Feb. 28.
It’s important for Switzerland to “advance quickly in our efforts to establish its financial center as a Renminbi hub,” Sindy Schiegel Werner, a Basel-based spokeswoman for the Swiss Bankers Association, said by e-mail on March 5.
In the U.S., the Chicago-based CME Group Inc., owner of the world’s biggest futures exchange, introduced offshore yuan futures on Feb. 25. The U.S. Treasury regularly discusses China’s financial sector with American companies, an official said by e-mail on March 7, declining to be more specific.
As the biggest center for international-bond issuance and currency trading, London has an advantage because of ease of recruiting, legal framework and trading systems, Swift said in its report last year. The time zone overlapping markets in Asia and America is another plus, according to Swift.
The City of London Corp., which oversees the U.K.’s main financial district, started a campaign in April to boost its share of yuan business, enlisting lenders including Barclays Plc, HSBC, Standard Chartered, Bank of China and China Construction China to discuss and promote that goal.
HSBC sold yuan-denominated bonds in London that month, becoming the first company to issue Dim Sum notes outside of mainland China and Hong Kong.
While the swap won’t influence the exchange rate directly, it will help to boost the confidence of companies trading the yuan as the central bank stands by to provide liquidity in times of stress, Adam Vos, the global head of currency forwards at Deutsche Bank AG in London, said in a telephone interview on Feb. 25.
“By giving people more confidence that they’ll be able to settle trades, it encourages more participants to the market,” Vos said.
Foreign-exchange swaps in deliverable yuan surged by 240 percent to an average $3.1 billion a day in London in the first half of 2012 from the same period of 2011, the City of London Corp. wrote in an e-mailed statement on Jan. 31.
Citigroup Inc. said Feb. 27 that it added yuan to its so-called pooling service in London, a tool to manage cash flow and foreign-exchange costs by notionally offsetting cash balances without performing currency trades, in response to the “growing internationalization” of the yuan.
“London has a natural fit,” Vos said. “Foreign exchange happens in London -- liquidity has a gravitational pull, and right now, London has that liquidity.”