London steals a march on New York with Beijing swap agreement
In an apparent about-turn, Mervyn King agreed to sign a swap agreement with Beijing as soon as possible, in order to keep up with the accelerated pace of RMB internationalisation.
Bank of England Governor Mervyn King has announced that a swap line will be established between the UK and China following a meeting in Beijing with Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), as pressure mounts on London to remain at the forefront of renminbi (RMB) internationalisation.
“Most likely, there has been some strain on London to develop a swap line because of the accelerated internationalisation process of the RMB,” says Ju Wang, senior Asia FX strategist for HSBC in Hong Kong. “Taiwan and Singapore both have new clearing banks in place and without the swap line, London would have fallen behind the curve.” On January 25, Bank of China (Taiwan) and the PBoC signed an RMB clearing agreement which will allow financial institutions in Taiwan to clear RMB cross-border transactions through mainland correspondent banks. This was followed by the appointment of ICBC (Singapore) as the clearing bank for RMB in Singapore on February 8.
The pressure for a swap line has mostly come from the private sector, says Wang. As opposed to other South East Asian countries, there is little trade and FDI settled in RMB in the UK, but there have been developments on the investment side which banks in the UK hope to continue.
Last December, the BoE shied away from pressure to create a swap line with the PBoC. But the apparent change of heart will see a currency swap agreement between London and Beijing made as soon as possible, says King.
Wang says the BoE's initial rejection of a swap agreement was down to the fact there is little imminent need for the UK to shore up RMB reserves for counterparties given limited RMB exposures. “The Central Bank mandates a swap line to protect against instability – this wouldn’t have been the case with the RMB and the Central Bank wouldn’t have wanted to confuse their role,” says Wang. “But now the Central Bank seems to realise that it is important to put in place the infrastructure for the long term. This is another reason for the change of heart.” Mark Williams, chief China economist at Capital Economics, sees the move as a natural step for London to take: “London has long been trying to establish itself as the biggest centre for RMB outside of Asia and this is a step in the right direction.”
And although there may have been added pressure due to developments in Taiwan and Singapore, it must be stressed that the UK is not in competition with Asia, says Williams: “Any challenge to London in its quest to becoming the Western hub for RMB will come from North America and Europe. Political motivations prevent a hub being created in North America, and compared to the rest of Europe, London has the natural advantage and is actually being proactive. London will compliment the centre in Hong Kong,” says Williams.
“I don’t think this is a reply to the developments between Taiwan and China. The links across the strait would not be a threat to them.”
In April 2012, HSBC launched the first RMB denominated (dim sum) bond out of London. The issue was followed by China Construction Bank, the first Chinese institution to issue a dim sum bond out of London in November.
In a recent survey by HSBC, 77% of the people polled believed that by 2015, a third of all trade will be settled in RMB.