Bank of England Prepared to Facilitate Yuan Clearing Bank

The Bank of England is ready to help create a clearing bank for yuan in London as the City seeks to become an offshore hub for trading the Chinese currency, Chief Cashier Chris Salmon said.

While the U.K. doesn’t “absolutely” need such an institution for yuan transactions, there is a “will in the market for a London clearing bank to be established,” Salmon said in an interview in London yesterday. “We’ll be prepared to facilitate that, in so far as we need to,” he said.

British Prime Minister David Cameron plans to lead a trade delegation to China in December, after Chancellor of the Exchequer George Osborne announced in Beijing last month that China and the U.K. will introduce direct trading between the yuan and the British pound. China also approved 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.

“If you think the RQFII provides a way for capital to flow back to China from outside, and in the context of liberalization of the capital account, it’s a step forward,” Salmon said.

Further agreements between Britain and China 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 October.

‘Broader Policy’

“It’s not a special arrangement” for Chinese banks, Salmon told the Conference on the Future of Renminbi in the Global Financial Markets, organized by City & Financial, in London yesterday. “It’s part of a broader policy.”

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. The U.K. is committed to keeping the London market liquid, including possibly setting up a clearing bank, Sajid Javid, financial secretary to the Treasury, said at yesterday’s conference.

Salmon said that while there is no imperative to establishing a London clearing bank for yuan, “it can’t hinder the market growing.”

International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than 1 percent in 2009, according to Deutsche Bank AG. Daily yuan transactions surged to $120 billion in April from $34 billion in 2010, making it the ninth most-traded currency in the world, according to a September report by the Bank for International Settlements in Basel, Switzerland.

The Chinese yuan’s premium over the central bank’s reference rate fell to a four-week low after a Communist Party meeting failed to detail measures to free up financial markets. The state will stay “dominant” in the economy while markets will play a “decisive” role in allocating resources, according to a communique released yesterday after the third full meeting, or plenum, of the party’s 18th Central Committee.

“The path to convertibility will ultimately involve further liberalization of the capital account,” Salmon said.

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