The UK has agreed a series of financial measures with China, which include establishing a direct trading link between the British pound (GBP) and the Chinese renminbi (RMB). London will also become the first foreign centre allowed to invest directly in domestic Chinese stocks and bonds.
Announcing the agreements British chancellor of the exchequer, George Osborne, who is visiting Beijing said that market players in London would be able to apply for licenses to invest directly into China and that state-owned Chinese banks would be allowed to expand their activities in the UK.
“My ambition is to make sure London is the western hub for yuan business,” Osborne said in a statement. “More trade and more investment means more business and more jobs for Britain.” The British pound (GBP) will become the fourth big currency with direct trading links – a privilege so far limited to the US and Australian dollars (USD/AUD) and the Japanese yen (JPY).
Commenting on the deal, Professor Michael Moore of Warwick Business School said: “This is a good move by the chancellor for London to retain its status as the world’s centre for foreign exchange [FX] trade. London has 40% of the FX trade. The next is New York with 20% and after that no other centre has above 10%.
“The Chinese are trying to internationalise their currency and the RMB is a growing market. Hong Kong has been aggressively stealing markets from London, for instance London has been the centre of wine trade for 1,000 years but that has now moved to Hong Kong and they did that in just three years.
“If Hong Kong gets the US dollar/RMB market then other trade will gravitate there as well. London has the infrastructure in place and making things easier for the Chinese banks will help keep that market in the UK capital. There might be concerns that the Chinese banks, which are mainly state-owned, are not as well regulated, but they will be trading in RMB and given the importance of the market this is a compromise worth taking.”
Steve Barrow, a currency strategist with Standard Bank, said that the deal gives the RMB a bigger role as a reserve and a trading currency, and help China in its financial rivalry with the US.
“It’s going to take China a very, very long time to get even close to the US’s dominance, but at the moment you have to say that’s the direction in which it’s heading,” he commented.
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