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Foreign Exchange

UK’s claim to be RMB trading centre is a no-brainer

At last a good news story. Monday’s headlines have been dominated by the historic agreement between the UK government and the Hong Kong Monetary Authority (HKMA) aimed at fostering closer collaboration towards the internationalization of the Chinese renminbi (RMB).

But should we really be surprised by the UK Chancellor of the Exchequer George Osborne staking the UK’s claim as a major RMB trading hub? Indeed, it would be rather odd that he did not. London is the world’s major currency trading hub, which, depending on the numbers you cite, sees between 45% and 50% of the total volume traded in the FX markets daily. Osborne’s pitch here is to say that London has a presence in all other markets, with corporate access across European time and US time zones. And with RMB now the fastest-growing currency pair by a long shot, he is only making sure RMB is part of that. This is about positioning.

He’s also trying to make the right noises too, as he attempts to promote London as a major financial centre or, perhaps more accurately, reaffirms it. With all the talk of the financial transactions tax being imposed across Europe, or, at the least in France, and the UK’s reticence to such an idea, one shouldn’t be surprised at this proactive move. This was for the headlines.

The most important fact here is the announcement, made prior to Monday’s headline-grabbing events, that Hong Kong will be extending the trading hours of the RTGS (Real Time Gross Settlement) clearing system to 15 hours a day (from 8:30am to 23:30pm Hong Kong time) by the end of June, thus giving institutions in Europe and beyond an extended period to settle same day CNH transactions.

Monday’s announcement isn’t a precursor to establishing a London clearer either – that is a decision for the People’s Bank of China, and its decision only. That won’t be an impediment to growth though. There isn’t a USD clearer in Europe or Asia either – the Fed simply provides for settlement trading 23 hours a day.

 CNH liquidity has outgrown the NDF market

 
 Source: HSBC

And while it has been positive PR for Osborne to announce the UK’s tie up with the HKMA, markets, as per usual, are one-step ahead of the action. In almost 16 months since the CNH (offshore RMB) market first started trading in Hong Kong, London, as a trading centre, has made some impressive progress. Estimating actual average daily trading volumes is a tricky pastime, but a survey of RMB market makers in London estimates London’s turnover to be around 15% of the overall market. In a note published in September by HSBC, the market had already surpassed trading volume in the non-deliverable forward market, at more than $4 billion a day. Given the exponential growth rate, one would expect that that has grown substantially since then.

Ultimately, the real benefits take-up comes as more and more corporates move towards RMB invoicing, and anecdotal evidence suggests companies are beginning to negotiate decent discounts for RMB invoicing. Swift’s latest data, from the month of November, showed RMB payment volumes resumed their growth after two months of declines. Stripping out Hong Kong and China, the rest of the world makes up 14% of RMB payments.

It is these invoice flows that will be a key indicator for London’s FX flows, as long as the CNH bond market flows remain dominated by Hong Kong. This is only London’s market to lose.

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