Renminbi: Why not swap?

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Without a currency swap line between London and Beijing, London might lack the corporate confidence it needs to become an offshore renminbi hub in the west.

In December, Safe, China’s foreign exchange regulator, removed the $1 billion limit imposed on foreign sovereign wealth funds, central banks and monetary authorities wishing to access Chinese assets through the qualified foreign institutional investor scheme.

And as new leadership in Beijing settles in, China watchers and international investors can rest assured that the internationalization of the renminbi will continue to gain momentum. Full convertibility of the currency could be introduced within the next 10 years.

But there is an unlikely antagonist to China’s ambition. London, which has clearly expressed its aim to become the western offshore renminbi hub, seems resistant to Chinese developments.

Although China commentators have expressed their interest and the desirability of creating a swap line between the Bank of England and the People’s Bank of China, there is no sign of any movement on the issue from the UK central bank.

Although a swap line is not essential to the development of London’s offshore renminbi market, there are several benefits to putting one in place. The main advantage would be that London would be able to tap into China’s onshore renminbi liquidity directly.

More pertinently, however, a swap arrangement between London and Beijing would boost corporate confidence in the offshore use of the currency and push forward London’s position as the currency’s premier offshore hub.

The Bank of England already has swaps in place with the Federal Reserve and the European Central Bank. And in November 2011, it agreed to establish bilateral liquidity swap arrangements with the Bank of Canada, the Swiss National Bank and the Bank of Japan. Surely, if it wants the renminbi to play a deeper role in London, a swap line with Beijing should also be on the agenda.

London has frequently hailed its natural advantages as an offshore renminbi centre. It has the expertise, is in a favourable time zone and is the world’s largest foreign-exchange trading centre. But without a swap line in place corporate confidence could be seen to be lacking.