UK, China RMB swap lines could be world's largest at CNY450 billion
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

UK, China RMB swap lines could be world's largest at CNY450 billion

UK companies will likely be able to trade with China more freely under a proposed currency swap agreement between the countries’ central banks. John McCormick, Chairman of RBS Group Asia Pacific, says the first renminbi bilateral swap line between China and a G7 country could be the largest yet at about CNY450 billion.


John McCormick, Chairman of RBS Asia Pacific

Since the City of London announced in April last year its intention to become a centre of business denominated in renminbi (RMB),market makers, including RBS, have been urging the Bank of England to open a RMB swap line with the People’s Bank of China (PBoC). PBoC has signed a total of 19 swap lines with central banks including in Singapore, Australia, Turkey and the UAE. The largest was a CNY400 billion line with Hong Kong. During a visit to Beijing in February, BoE Governor Mervyn King finally started discussions with his equivalent, Governor Zhou Xiaochuan, on a three-year sterling / RMB currency swap agreement. This is good news for London, good news for UK banks and good news for British companies. It’s even good news for European companies that will be able to benefit from using London as a hub for RMB trading.

The fact that China has chosen the UK as the first among G7 nations to access a swap line gives the UK, and British companies, first advantage in benefiting from business opportunities in an economy that is still growing at close to 8 per cent annually.




While the bilateral swap lines PBoC has already established with other central banks are agreed on this stand-by basis, a good precedent was set earlier this year when the Bank of Korea (BOK) actually activated their USD59 billion line, accessing CNY62 million to help domestic traders make RMB payments.

So what difference could a stand-by swap line, rather than activated swap line, actually make? In short, it should give confidence to investors and companies who are currently nervous about using the lightly-traded RMB for cash management, trade settlement or debt financing because of concerns about accessing and disposing of the currency at short notice or in large sums. The agreement would effectively ensure that access to the currency would be there if needed.

At present, UK companies are reluctant to adopt RMB as a functional currency because of a lack of knowledge of the market, because of confusion around unfamiliar Chinese regulations and, in particular, because of the lack of market liquidity. They prefer to use foreign exchange, swapping sterling as needed to complete transactions and payments.

The fact that 98 per cent of RMB payments made in London in 2012 were for settling institutional transfers rather than trade, according to SWIFT data, shows how UK businesses need the reassurance that the swap line can provide.

To estimate the possible size of the BoE / PBoC swap line, it helps to look at the size of the agreements of other central banks compared with that country’s annual bilateral trade volume with China. The ratios for Brazil, Australia, Malaysia, Hong Kong and Korea range between 22 per cent and 38 per cent.

Considering a UK swap line is likely to increase London’s role as a RMB trading hub for European businesses, it is helpful to look at the ratio in Singapore, which is an equivalent hub in southeast Asia. While the swap line with the city state accounts for 73 per cent of its trade volume with China, as a member of the Association of Southeast Asian Nations (ASEAN), which also includes Thailand and Malaysia, it constitutes 13 per cent. 


Let us assume the size of UK swap line is as high as 13 per cent of European/China trade volume, it requires a CNY450 billion currency swap between the BoE and the PBoC, which would make it the largest agreement with China yet. In addition, the BoE can invest a proportion of RMB obtained through the swap line in China’s interbank bond market.

Whatever the eventual size of the swap line between the BoE and PBoC, in the end, it can only open more opportunities for UK companies to trade more efficiently, effectively and profitably with China. 

For more RBS Insight content, click here

Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.

The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

Gift this article