Photographer: Xaume Olleros/Bloomberg

China Gives London's Yuan Hub Ambitions a Boost Before Xi Visit

  • PBOC, Finance Ministry Plan First Offshore Debt Sales in U.K.
  • Shanghai to extend yuan trading hours into London trading day

London’s bid to become a major yuan trading hub is getting a boost before Chinese President Xi Jinping visits the city next week. 

The U.K. capital is set to host the first offshore debt sale by the People’s Bank of China as well as the Finance Ministry’s debut issue of local-currency sovereign bonds outside of China and Hong Kong. Asia’s biggest economy will also double yuan trading hours in Shanghai to provide a more reliable guide to the currency’s value through European trading hours.

“We are seeing the internationalization of Chinese renmimbi growing at a pretty brisk pace here,” Richard Holmes, chief executive officer for Europe at Standard Chartered Plc, told reporters in London on Wednesday. “There is a lot further to go and that’s due to what I view as the end of U.S. dominance.”

Issuing notes in London will help cement the city’s place as the dominant yuan hub for Europe as Paris and Frankfurt compete for a share of the market. Outside of China, only Hong Kong and Singapore are bigger clearing centers than the U.K. for yuan transactions, according to the Society for Worldwide Interbank Financial Telecommunications.

China is allowing global funds increased access to its domestic capital markets and broadening the range of yuan-denominated investments available offshore as it pushes for the currency to win reserve status at the International Monetary Fund in a November review. The proposed debt sales in London come at a time when yields in the onshore market are declining, with the coupon on 10-year bonds having been set below 3 percent at an auction for the first time since 2008.

Extended Trading

China is extending trading hours in Shanghai to 11:30 p.m. local time from the current 4:30 p.m. as it seeks to make the yuan part of the IMF’s Special Drawing Rights,  according to people familiar with the matter. The reserves basket is made up of the greenback, euro, yen and British pound, and their value is calculated daily in dollar terms using midday exchange rates in London. The IMF said in August that a market-based representative yuan rate would be needed for the currency’s inclusion.

"It’s really taking momentum here in terms of what the Chinese want to do in the U.K.," said Ilan Solot, an emerging-market currency strategist at Brown Brothers Harriman in London. "We are going to have more information about market sentiment on the onshore yuan during London hours."

The U.K. accounted for the largest portion of the world’s daily $5.3 trillion currency trading in 2013 with a 41 percent market share, according to a report by the Bank for International Settlements. The U.S. had 19 percent, while Singapore and Japan took 5.7 percent and 5.6 percent, respectively. Hong Kong ranked fifth with 4.1 percent.

Britain became the first foreign sovereign issuer of yuan bonds last year and was Europe’s first country to house a clearing bank for the Chinese currency. It was second, after Hong Kong, to get a Renminbi Qualified Foreign Institutional Investor quota, which allows yuan raised offshore to be invested in China’s domestic capital markets.

Shock Devaluation

A surprise yuan devaluation in August damped demand among European investors. Only 1 percent of a 1 billion yuan ($156 million) issue of two-year bonds in London this week by China Construction Bank Corp. was purchased by investors from the continent, while the rest was taken up by Asia-based buyers.

China plans also to issue yuan-denominated sovereign bonds in London for the first time, according to people familiar with the matter. The sale is expected to take place after the PBOC sells one-year bills in the U.K. capital, the people said.

The planned sale comes before Xi’s first state visit to the U.K. from Oct. 19 to 23 and follows a U.S. trip he made in late September. There’s a “sharp contrast” between the U.S. and U.K. visits, according to Solot at Brown Brothers Harriman.

"In the U.S., it’s all about cyber security, investment, trade regulations and standards,” he said. “In the U.K., it’s so much more progressive: trading hours covering the U.K., selling yuan bonds in U.K. It’s very positive. The relations are definitely improving a lot."