The decline of the dollar

London Takes Lead Seizing on China’s Yuan Push as Trading Starts

By clinching a deal allowing the direct exchange of the yuan for British pounds, the U.K. got the jump on European counterparts grappling to become a hub for the most-used currency in global trade after the U.S. dollar.

Bloomberg,

18 June, 2014

While four other nations had already signed such accords with China, the U.K.’s deal yesterday made it the first European country to do so. London has been competing with cities including Frankfurt to become Europe’s offshore yuan hub. Direct trading of the yuan-pound pair is scheduled to start today.

“Given the sheer pace and scale of growth in renminbi trade, the opportunity for London cannot be overstated,” Peter Sands, group chief executive at Standard Chartered Plc in London, said by e-mail yesterday. “The appointment of an official clearer is a logical step in London’s development as a leading offshore renminbi center.”

China is seeking to strengthen commercial relations with countries including the U.K. as Premier Li Keqiang this week outlined a goal to expand trade with the country to $100 billion by the end of 2015.

“We are keen to see the renminbi reach its next stage of development through expanded use as an investment currency, and view the establishment of a liquidity pool in London as a critical step in that process,” Evan Goldstein, Deutsche Bank AG’s global head of renminbi services in Hong Kong, said in an e-mailed statement yesterday.

The People’s Bank of China appointed China Construction Bank Co., the nation’s second-largest lender, as London’s first yuan clearing bank yesterday.

Lowering Costs

The pound is the fifth major currency to trade directly against the yuan in Shanghai, joining the Australian and New Zealand dollars, the Japanese yen and the U.S. dollar and beating plans by Singapore and South Korea. The yuan overtook the euro in December to become the most used currency in global trade finance after the dollar, according to HSBC Holdings Plc. It will become fully convertible in the next two to three years.

The introduction of the currency pair will help lower foreign-exchange transaction costs between the U.K. and China, the PBOC said in a statement yesterday.

The bank announces a daily reference rate for the yuan against the British pound at around 9:15 a.m. in Shanghai on each trading day, even prior to the start of the direct trading. The rate was set at 10.4413 per pound yesterday, compared with 10.4439 the previous day, according to the China Foreign Exchange Trade System.

Market Development

Direct trading means the fixing will be computed without involving a cross rate with the U.S. dollar. HSBC was selected by the PBOC to be among the first batch of market makers for the direct trading of the Chinese and British currencies.

“Long-term financing in renminbi is much needed to support the real economy and further develop the next phase of China’s market development,” Spencer Lake, global head of capital financing at HSBC in London, said by e-mail yesterday.

China’s currency ranked seventh for global payments in April, according to the Society for Worldwide Interbank Financial Telecommunications, and the U.K. trailed both Hong Kong and Singapore in handling these transactions.

Singapore announced plans to start direct trading between its currency and the yuan in October, while South Korea is making preparations for a direct link of the won and the yuan, aiming to start it within the year, Reuters reported yesterday, citing Choi Hee-nam, head of the finance ministry’s international finance bureau.

“Connecting British firms and markets to China’s extraordinary expansion is a key part of our economic plan, because it brings jobs and investment to our country,” George Osborne, Chancellor of the Exchequer, said in a statement yesterday.

Yuan to trade directly with UK pound

Today's change replaces system of referencing the two currencies' rates against US dollar

SCMP,

19 June, 2014

While Premier Li Keqiang tours Britain, the yuan took another major step on its global journey yesterday as Beijing said the currency will start trading directly with the British pound from today.

The central parity rate of yuan against pound - or the midpoint exchange rate around which the daily rate will hover - will be calculated based on the direct quotations from the appointed market markers. Previously, traders would have to reference the two currencies' exchange rates against the US dollar if they wanted to convert yuan to pound or vice versa.

The transaction volume of London's yuan exchange market, which includes trading of spots, forwards, swaps and options, is expected to take off following the move.

Market watchers expect overall investor interest in yuan to pick up and help create a huge "Euroyuan" market the way the US dollar was boosted in its early years as a global currency.

Euroyuan refers to yuan deposits at foreign banks or foreign branches of Chinese banks. London is the largest depository for the Eurodollar, or US dollars outside the United States.

"Given London's dominant position in the global forex market and the UK's sizeable banking sector, the potential for financial products would be enormous," said ANZ economist Liu Ligang. "Direct conversion and the clearing facility will lay the foundation for London to nurture a Euroyuan market."

London currently has only around 15 billion yuan (HK$18.86 billion) of deposits, lagging far behind its major competitors such as Hong Kong and Singapore, or even Luxembourg.

Robert Minikin, senior foreign exchange strategist at Standard Chartered, said he expects the yuan option market, in particular, to grow rapidly.

"The market potential of the option market should be highlighted thanks to the increasing volatility of the renminbi, which would prompt corporates to hedge their yuan exposure," he said.

London is the second-biggest yuan foreign exchange centre with nearly 20 per cent of the market, while Hong Kong accounts for 61 per cent of the worldwide total.

The daily average yuan spot trading in London in the first half of last year stood at US$5 billion, representing a nearly seven-fold increase from less than US$1 billion in 2011, according to the City of London.

"The direct link of these two currencies unlocks a great deal of potential for the investment community, providing quick, transparent pricing that will facilitate the adoption of the renminbi for investment purposes," said Evan Goldstein, Deutsche Bank global head of renminbi services.

Britain is China's 12th largest trading partner, with bilateral trade crossing US$70 billion last year. Bilateral trade growth increased by 11 per cent last year, outperforming China's total trade growth of 7.6 per cent during the period.

Another significant currency move yesterday came from South Korea. A senior Korean official said that direct trading between the yuan and the Korean won is expected this year.

The currencies which are allowed to trade directly with the yuan include the US dollar, Japanese yen, Australian dollar, New Zealand dollar, Russian rouble and Malaysian ringgit.

"It is a surprise that the Korean won hasn't yet been allowed direct trading against China given its position as one of the biggest trading partners of China," said Minikin.