London Strengthens Role as Western Hub for China Trading

The UK and China are poised to sign an agreement which will see London step up its campaign to attract Chinese investment by creating a renminbi (RMB) clearing bank in the capital.

Reports suggest that the Bank of England (BoE) and the People’s Bank of China (PBoC) will seal the agreement on renminbi clearing and settlement at the start of next week. UK Treasury confirmed that a designated clearing bank will be named shortly. The deal will reinforce London’s position as a Western hub for offering RMB trade business.

Data from financial messaging services provider SWIFT shows that London enjoys a 41% share of the global foreign exchange (FX) market and already handles more than 60% of RMB trade outside China. While this still amounts to only half the volumes traded in Hong Kong, London is well-placed to increase its share and fend off competition from other European financial centres such as Frankfurt and Luxembourg.

China has been a key focus of British chancellor George Osborne’s efforts to boost exports of financial services from the UK, which was the first Group of Seven country to agree a
RMB swap line with the PBOC last October
.

According to a
Financial Times
report, Australia is also hoping that its financial services industry will gain from China’s opening of capital markets. Earlier this week Philip Lowe, deputy governor of the Reserve Bank of Australia (RBA), described the move as having “the potential to create a seismic shift in the international monetary and financial landscape”.

A Boost for Europe

Following the announcement, Royal Bank of Scotland (RBS) issued the following Q&A commentary from Janet Ming, the bank’s head of China desk, Europe, the Middle East and Africa (EMEA).

Q: Why is it important that London has RMB clearing bank?

A: Currently London has to rely on Hong Kong for RMB liquidity and clearing services. Having a clearing bank in London – the world’s biggest FX and bond trading centre – would help to further develop RMB-related trading and bond issuance activities in the City. It would also help other financial centres in Europe, such as Luxembourg, Paris, Frankfurt and Switzerland, to develop RMB business through access to a London-based RMB clearing bank with only an hour time difference.

What will the RMB clearing bank do?

The clearing bank would create a channel for cross-border RMB settlement through the banking system. Before the Chinese government launches the China International Payment Platform (CIPS), which will serve as a global RMB clearing system, the assigned clearing bank would help banks based in London access the existing RMB onshore clearing system, China National Advanced Payment System (CNAPS), to ease the RMB clearing process.

What are the benefits of having one?

It would demonstrate the commitment from both the Chinese and UK governments to support RMB internationalisation while also strengthening London’s position as a key RMB offshore hub. For RMB settlement between counterparties based in Europe, the timeframe would be substantially reduced, although there would still be the time difference issue for clearing between Asian and European counterparties, since that would still have to go through the central clearing platform in China.

What are the steps that need to be taken in order for such a clearing pattern to be set up?

Interested banks would need to apply to the Chinese government to be considered. Factors taken into consideration would be the size of the interested bank, its clearing capabilities, global network, market influence, etc.


Who is likely to be appointed?

It would be one of the big Chinese banks.

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