By Rebecca Lowe
City lawyers in London have welcomed a deal struck with Beijing to transform the UK into an offshore trading hub for China’s renminbi (RMB), but stress it is only the first step in a long-term process.
Linklaters partner and capital finance specialist Nigel Pridmore calls the deal ‘one of the most significant developments in the international financial markets this century’.
George Osborne, UK Chancellor of the Exchequer, signed the agreement with the Hong Kong Monetary Authority on 16 January. The aim is to put London on a level playing field with Hong Kong, currently the main offshore region permitted to exchange the currency.
Since China opened itself up to international trade in the 1980s, it has kept tight control over the RMB to protect it from unpredictable market fluctuations and help boost the country’s domestic export sector.
‘It is important to see this as part of a longer process, starting with the liberalisations of 2010,’ Linklaters’ Pridmore tells IBA Global Insight.
‘London’s participation will enhance the access to renminbi of UK and European corporates and accelerate internationalisation of the currency through its use in trade settlements, as well as deepening liquidity in the foreign exchange market.’
‘This is positive news for London, but the jury’s out as to what real impact this continuing dialogue will have'
Allen and Overy, London
As part of the deal, Hong Kong has agreed with London to set up a forum of key private players to meet twice a year to explore ways the two financial centres can join up to develop an offshore RMB business in the UK.
Banks and businesses have heralded the move, which will cement London’s reputation as a leading centre for currency exchange, while giving China access to more sophisticated foreign exchange and bond markets.
Figures from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) reveal London’s growing influence. The UK saw its share of RMB payments increase from 22.1 per cent in the first quarter of 2011 to 30 per cent in the fourth quarter.
Conversely, Singapore’s share dropped from 52.9 per cent to 30.6 per cent over the same period.
‘This deal will help the establishment of London as the main gateway for Asia into the European Union – China’s largest trade partner – for the development of RMB denominated financial products and trade finance,’ says Pridmore.
The meteoric rise of the RMB has been well documented. Growing numbers of non-Chinese multinationals have issued RMB bonds over the past few months, including Unilever, Tesco, BP and McDonalds.
Could the RMB replace the US dollar as chief global reserve currency?
In a recent Allen & Overy report, the RMB was predicted to be the third most important currency for international trade and finance by 2020, after the US dollar and the euro. According to a recent Chatham House report, by the end of the 2020, one fifth of all global trade deals will be conducted in RMB.
Yet some City experts are wary of getting over-excited too soon.
‘It’s a little too early to tell,’ says Freshfields’ global head of finance Alan Newton. ‘It depends what arrangements are made with the Central Bank of China and how easily RMB can be swapped into other currencies. It depends on how well that exchange infrastructure is built as cooperation turns into practical reality.’
Kathleen Wong, counsel in Allen & Overy’s banking practice in London, is equally qualified with her enthusiasm.
‘This is positive news for London, but the jury’s out as to what real impact this continuing dialogue will have in transforming London into an RMB trading hub,’ she says. ‘Without further loosening of controls by Beijing, it is unlikely that RMB trading will grow substantially beyond Hong Kong.’
So could the RMB replace the US dollar as the chief global reserve currency? Not yet, it seems.
Recent regulatory reform by China has eased cross-border movements between RMB capital accounts, but further significant changes are needed to the domestic currency, interest rate and capital markets before it becomes fully convertible.
And much hinges on the confidence that investors continue to have in China’s economic future. ‘I don’t see RMB displacing the dollar soon,’ says Newton.
‘Sterling continued to be a major currency long after the UK ceased to be the world’s largest economy and the US will still be a massive economy even if overtaken by China. I wouldn’t be so quick to write off the US as a major reserve currency.’
Beijing’s preoccupation with domestic stability could also hinder the RMB’s international development, Newton adds. ‘China would lose a major control lever if RMB became a free currency and was able to rise and fall with the market.
'It would be likely to appreciate very rapidly and this would have an impact on Chinese exports and growth, and potentially on the pace of social reform, which China is anxious to keep under control.’