Bank of China: How London can become the next offshore RMB centre

Author: Gemma Varriale | Published: 9 Feb 2012
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London’s attempts to position itself as the West’s offshore RMB centre will be bolstered by global familiarity with the city’s strong legal and regulatory systems, the Bank of China has said.

“London can help develop new products for RMB trading based on its substantial experience in other currencies,” said a Bank of China spokesperson in London.

In October, Bank of China (Hong Kong) urged European markets to get better acquainted with the offshore RMB products on offer. Bank of China (Hong Kong) deputy general manager of global markets, Tony Wang, told IFLR economic uncertainty in the Eurozone had provided a good reason for European and US corporations to get more involved in the market. He advised new entrants to stop thinking about the currency as a mysterious product.

Since gradual liberalisation of the currency began in 2004, the size of the RMB market has increased dramatically. RMB deposits in Hong Kong have increased from 64 billion in January 2010 to 627 billion in November 2011 and the volume of RMB-denominated bonds have increased from zero to $31.5bn in just four years. The UK already handles almost 30% of all RMB foreign exchange trading and is home to tens of billions of RMB deposits.

But the policies under which offshore RMB funds can be utilised, traded and remitted onshore comprise a huge system , and transforming London into an RMB hub will likely involve regulatory challenges.

“The key about this internationalisation of RMB is that the regulatory landscape is constantly developing,” said Adam Tyrell, head of capital markets Europe at Standard Chartered Bank. “The authorities onshore are continually reviewing the rules to make sure that the market develops.”

Speaking at the City Week event in London on Tuesday, Tyrell said that this is further evidence of the Chinese authorities’ enthusiasm for internationalisation, within certain controls.

London-based Nigel Pridmore of Linklaters said the really enticing thing would be what happens when those controls get lowered such that investment from onshore to offshore becomes free.

For London to effectively position itself as the West’s offshore RMB centre, one clear priority will have to be increasing RMB liquidity in order to further develop RMB-related trading. London could also use the existing Hong Kong model of a single clearing bank - since 2009, the Bank of China has been the sole RMB clearing bank in Hong Kong.

The challenge at present is that there isn’t much RMB trade flowing through London. With most of the trade in CNH going through Hong Kong - just 0.6% of China’s imports are from the UK - there is very little RMB liquidity accumulated in London.

Wang said the People’s Bank of China (PBOC) aimed to facilitate renminbi use in international markets. “As China is a big player in terms of international trade, it is right to say that its currency shall enjoy a status as favourable as other currencies do,” he said. But full internationalisation of the currency will take time.

In the meantime, Tyrell said there was also a need for clarification on whether clearing would be carried out directly with the People’s Bank of China (PBOC) in Mainland China or via PBOC’s Hong Kong counterpart.

Charles Ng, associate director general of Invest Hong Kong identified several potential opportunities, including: RMB wealth management products, supported by arrangements for banks to invest in the Mainland China interbank bond market and the RMB QFII scheme, RMB exchange-traded products and RMB commodities contracts.

According to Pridmore, the strong support from the UK government, the Chinese government and UK financial institutions to work to develop an offshore RMB market in London should mean the initiative goes ahead.

HSBC yesterday announced the appointment of an RMB business head to lead the bank’s efforts in helping London become an offshore RMB centre. Paul Gooding previously headed HSBC's European credit trading for the past seven years.