British finance minister says Beijing agrees to make London hub for handling China’s yuan

The agreement, announced by Britain and China in a joint statement on Tuesday, falls under the Renminbi Qualified Foreign Institutional Investor plan, or the RQFII. This is the first time the RQFII has expanded outside Hong Kong to give investors more avenues to invest yuan and more incentives to hold the currency – an outcome desired by China which wants to turn the renminbi into a widely-traded currency some day. In return for the RQFII, the British government agreed to start talks to allow Chinese banks to set up wholesale branches in the United Kingdom, the two governments said, reducing regulatory hurdles for Chinese banks expanding in Britain. “The renminbi will now have a firmer footprint in the European market,” ANZ analysts said in a note. “With the increasing presence of Chinese banks in London, the granting of the RQFII license will strengthen and widen the platform for London to develop the offshore RMB (renminbi) bond market.” Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong said the amount granted under RQFII was substantial, underlining London as an important partner when it comes to RMB liberalisation. “This, together with FX swap arrangement in Europe shows that China is trying to reach more parts of the world,” Cheung said. China last week also signed a 350 billion yuan swap agreement with the European Central Bank in the second-largest of such deals to date. Under Tuesday’s agreement, London and Beijing will also allow the yuan to be traded against sterling directly, as opposed to going through the dollar, thereby markedly reducing transaction costs. A handful of countries including Singapore, Frankfurt, Taiwan and Kenya are vying for Beijing’s approval to be a designated centre for clearing yuan trades outside of China in the hope of offering what may be a lucrative financial service. But Chinese analysts have said London is a natural choice given it is as a major centre for global currency trades. Started in 2011 as a way of enticing investors to hold the yuan, the RQFII now has a global quota of 350 billion yuan, of which 134 billion yuan is utilised.

The announcement came in the middle of a five-day British trade mission to China led by finance minister George Osborne. On Monday, Britain unveiled simpler visa rules aimed at luring Chinese tourists. Osborne’s trip marks a return to normal exchanges after Beijing derailed a planned visit by Prime Minister David Cameron in April in retaliation for the British leader having met the Dalai Lama, the exiled Tibetan spiritual leader. Investors in London will be allowed to apply for licenses to invest yuan directly into China, Osborne announced. He said the Chinese central bank set an initial quota for London of 80 billion yuan ($12.7 billion). Tuesday’s announcement put London ahead in the race by global financial centers to gain a share of yuan-denominated business as Beijing gradually expands use of its currency for trade and investment. Hong Kong was the first financial center outside mainland China where trading of yuan was authorized. London banks have traded yuan since early last year. “Now London is a major global offshore center for the trading of the Chinese currency,” Osborne told reporters. Britain and China signed an agreement in June to have their central banks swap 200 billion yuan for 20 billion pounds. The European Central Bank and Beijing announced a similar agreement this month to swap 350 billion yuan for 45 billion euros. That suggested Frankfurt also might be in to become a center for business denominated in yuan. Also Tuesday, Osborne said China’s state-owned banks will be allowed to expand their operations in Britain by setting up wholesale branches. Cameron was forced to abandon his April trip after China said he would not be able to meet senior officials.

London to be China CNY Hub

dollar trading in 2013 has averaged $4.65 trillion. The Chinese government began liberalizing the currency in 2009, but controls still made it difficult for businesses to make payments directly in the yuan. In early 2012, the central bank announced that all Chinese companies could settle their trades in yuan and more directly swap foreign currencies with it. Beijing agreed Tuesday to make London a center for handling investment denominated in Chinas tightly controlled currency as the two sides set aside a spat over the Dalai Lama to expand financial ties. The announcement came in the middle of a five-day British trade mission to China led by finance minister George Osborne. On Monday, Britain unveiled simpler visa rules aimed at luring Chinese tourists. Osbornes trip marks a return to normal exchanges after Beijing derailed a planned visit by Prime Minister David Cameron in April in retaliation for the British leader having met the Dalai Lama, the exiled Tibetan spiritual leader. Investors in London will be allowed to apply for licenses to invest yuan directly into China, Osborne announced. He said the Chinese central bank set an initial quota for London of 80 billion yuan ($12.7 billion). Tuesdays announcement put London ahead in the race by global financial centers to gain a share of yuan-denominated business as Beijing gradually expands use of its currency for trade and investment. Hong Kong was the first financial center outside mainland China where trading of yuan was authorized. London banks have traded yuan since early last year. Now London is a major global offshore center for the trading of the Chinese currency, Osborne told reporters. Britain and China signed an agreement in June to have their central banks swap 200 billion yuan for 20 billion pounds. The European Central Bank and Beijing announced a similar agreement this month to swap 350 billion yuan for 45 billion euros.