Foreign exchange: London is the natural hub for renminbi

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Laurence Twelvetrees
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Offshore renminbi now $2.7 billion-a-day market; One hub for each time zone likely

George Osborne, the UK’s chancellor of the exchequer, last month said his government "isn’t prepared to let anyone steal the march" on London becoming the main renminbi trading hub outside Chinese territory.

Speaking at the launch of a new London-renminbi initiative hosted by the City of London Corporation, Osborne said London was best positioned to offer renminbi services outside China, citing the fact that the capital remained the most competitive financial services centre in the world.

Of the top-five financial centres, London was the only one to have improved its competitive position since last year, according to the Global Financial Centres Index constructed by the Z/Yen think-tank. London was ranked first, ahead of New York and Hong Kong.

"London is the world’s pre-eminent financial centre, and it’s becoming more successful," Osborne told the gathering. "By acting as a bridge between east and west, we can secure London’s position as the leading financial centre in the world in the years to come. We are not prepared to let anyone steal the march."

The City of London Corporation’s renminbi initiative is aimed at delivering private-sector and public-sector strategy on the technical, infrastructure and regulatory issues relating to renminbi trading in London.

The current members are the Bank of China, Barclays, Deutsche Bank, HSBC and Standard Chartered, with observers from HM Treasury, the Bank of England, and the Financial Services Authority.

Offshore RMB spot FX
Global market
Source: Bourse Consult survey 

The offshore renminbi market has grown from practically nothing two years ago to a $2.7 billion-a-day market, according to a report released by the City of London Corporation at the launch. Some $1.5 billion a day is traded in Hong Kong and $0.68 billion in London, with the remainder in other centres, such as Singapore and New York.

Those volumes are expected to continue to grow rapidly in the coming years, as more overseas companies make their trade payments in renminbi. Figures from Swift, the financial messaging platform spanning 210 countries, show that renminbi payments’ growth outpaced other currencies, growing at a compound monthly rate of 14.8% in 2011 compared with an average of 0.7% for other currencies. That propelled the renminbi as a payments currency from 30th in the world in January 2011 to 17th at the end of that year.

According to HSBC’s chief executive, Stuart Gulliver, who spoke at the launch, the biggest driver behind this growth in the offshore renminbi market by Chinese authorities is the need to settle trade debts. He said HSBC had so far settled renminbi in 58 countries.

Gulliver added that although there was a lot of competition among financial centres to become renminbi hubs, it was likely that there would eventually be one established trading hub in each time zone. London is, in other words, trying to avoid the perception that it is competing with Hong Kong as an offshore renminbi trading centre.

That may be wise, since London needs the direct access to renminbi settlement and clearing capabilities that are at present available only in Hong Kong.

There are nevertheless plenty of reasons to believe that London might eventually usurp Hong Kong as the pre-eminent trading centre for offshore renminbi. With respect to its time zone, London is best placed to cater for China’s growing base of trading partners around the world, not just in Asia.

Dariusz Kowalczyk, senior Asia ex-Japan economist at Crédit Agricole.
Dariusz Kowalczyk, senior Asia ex-Japan economist at Crédit Agricole
The size and sophistication of the London financial market will add further momentum. London’s global institutions bring large amounts of liquidity to the markets, an important factor behind London’s leading position in the FX market. Average daily FX turnover in London is approaching $2 trillion, corresponding to about 40% of the global market. Hong Kong might struggle to match the international reach of the London financial market, and its political ties with Beijing might constrict it rather than be an advantage.

Although London’s growth as an offshore market is to some extent hampered by a lack of direct access to settlement and clearing capabilities, London’s reliance on Hong Kong’s infrastructure might be only temporary, according to Dariusz Kowalczyk, senior Asia ex-Japan economist at Crédit Agricole. That is because the People’s Bank of China has announced that it is building infrastructure for a new international payment system, allowing foreign banks from across the world access to renminbis for trade and investment purposes.

The system, to be called the China International Payment System, will be ready in the next couple of years. The central bank said it would boost the international use of renminbi and should be operational for 17 hours a day.

"Once the system is ready, London banks will be able to access China’s RMB settlement infrastructure directly," says Kowalczyk. "At that point, London will become a competitor to Hong Kong in the area of offshore business."

This story first appeared at EuromoneyFXNews.