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Europe helps boost yuan use abroad

Updated: 2014-09-26 07:07
By Cecily Liu (China Daily Africa)

 Europe helps boost yuan use abroad

Initiatives from Beijing to internationalize the renminbi have created great competition among global financial centers across Europe, Asia and the US. Provided to China Daily

British government shows its commitment to internationalization of renminbi

Yuan activities are accelerating across European financial centers including London, Paris and Luxembourg, signaling a big step forward in the internationalization of the currency and Europe's crucial role in supporting this process.

Following the UK-China Economic and Financial Dialogue on Sept 12, the UK government announced that it will issue the first sovereign renminbi bond outside China, worth 2 billion yuan ($325 million; 253 million euros).

As well, Industrial and Commercial Bank of China has received a branch license for wholesale operations in the United Kingdom, becoming the first Chinese bank to do so after recent regulatory changes. The changes resulted from intense lobbying by Chinese banks in recent years, given that previously foreign banks were only allowed subsidiaries in London.

In Luxembourg and Paris, the People's Bank of China, China's central bank, was appointed as a yuan clearing bank last month. This follows the appointment of clearing banks in London and Frankfurt in June.

An official clearing bank facilitates the efficient clearing of offshore renminbi transactions, achieved through the appointed bank's direct collaboration with the People's Bank of China.

"Most of the recent announcements have related to Europe, and clearly this increases the role and so importance of Europe in the international use of the renminbi," says Andrew Carmichael, a partner at Linklaters law firm in London.

This is partly due to Europe's position as the largest international trading bloc in the world, with highly developed financial centers, whereas the focus in the United States would always be the dollar, he says.

Carmichael says the spread of renminbi activities across Europe shows a continuation of the Chinese government's strategy of developing multiple offshore renminbi hubs, which he says will continue to internationalize the currency while maintaining choice and competition.

Each center will contribute to renminbi internationalization using their respective strengths. For example, Luxembourg may focus on fund management and listings of renminbi bonds, while London's advantage may be in underwriting and foreign exchange, Carmichael says.

China's push to internationalize its currency started in 2008, when the global financial crisis demonstrated the danger of overreliance on the US dollar.

During the G20 summit in November 2008, then Chinese president Hu Jintao called for "a new international financial order that is fair, just, inclusive and orderly".

Beijing soon began to encourage the use of its currency in international trade, swap arrangements among central banks, and bank deposits and bond issuances in Hong Kong.

Trade in offshore renminbi has since boomed. Increasing Chinese exports have also led to a surge in demand for renminbi outside China as Chinese exporters increasingly expect to be paid in their own currency to eliminate exchange risks.

Initiatives from Beijing to internationalize the renminbi have created great competition among global financial centers across Europe, Asia and the US to gain a bigger share of the pie.

Asian financial centers such as Singapore, Taiwan and Macao are following Hong Kong's footsteps to grow offshore renminbi activities, fully utilizing their advantage of geographical proximity to the onshore Chinese mainland market.

In Europe, competition has been particularly strong between London and Luxembourg, with London being the famous financial center for banks and foreign exchange, and Luxembourg a global center for funds.

One issue that has received great attention in recent years is fierce lobbying by Chinese banks to establish branches in London, threatening that they would shift investment to Luxembourg if this could not be achieved.

Since the financial crisis in 2008, the British regulator has made it almost impossible for foreign banks to set up branches in the UK. Banks with branches would have had lending and financing capacity proportional to the parent company's balance sheet.

Subsidiaries, in contrast, are subject to the strict capital requirements that apply to Britain's local banks, so lending and financing capacity is proportional to the balance sheet of the subsidiary itself.

Years of lobbying led to substantial regulatory changes last year, and this month ICBC received its branch license for London.

Michelle Chen, a partner at the London-headquartered law firm Squire Sanders, says the granting of the branch license to ICBC and potentially other banks in the future supports the process of yuan globalization in London.

"The significance is not just for ICBC," Chen says. "I believe more Chinese banks will be granted branch licenses in the UK over time." Meanwhile, another significant outcome of the UK-China Economic and Financial Dialogue is the creation of a private sector working group to help develop China's onshore bond market further.

Chaired by the International Capital Markets Association in Zurich and China's National Association of Financial Market Institutional Investors, the working group will bring together experts from financial institutions in London and China to help China further develop an onshore bond market.

Spencer Lake, global head of capital financing at HSBC, who is also deputy chairman of the International Capital Markets Association, says his team is looking forward to working with policymakers and industry experts, including the association and the National Association of Financial Market Institutional Investors, to build closer links between the UK and China capital markets.

"As China stands poised to become the world's largest economy and continues to expand its economic influence, we believe that robust and well-functioning capital markets are essential both on the mainland and offshore," Lake says.

Huo Rongrong, head of China and renminbi business development at HSBC EMEA, says the initiative shows that the UK is thinking ahead in realizing that the next step to engage with renminbi activities is to link onshore and offshore activities together.

"The purpose is to break the barriers so capital can flow into China and out of China more effectively and more investment activities can be done. Another focus is to help China develop a functional and sophisticated capital market, which is such an important funding channel to fuel future economic growth."

Another example that demonstrates the UK government's commitment to lead and to innovate under the wider renminbi internationalization initiative is a memorandum of understanding signed in June between the UK's Export Credits Guarantee Department, HSBC Bank Plc, and a leading Chinese company, to support long-term renminbi financing.

Under the agreement, the three parties will work toward finding a workable structure for funding large, long-term equipment or projects in renminbi.

Huo says this initiative shows that the UK government has officially approved the renminbi as a long-term funding option, meaning that it is ready to provide guarantees to further boost import and export activities.

"Previously, they would back the dollar, they would back the euro, but now the UK government is ready to back the renminbi. Lots of commitment and effort have been demonstrated."

Globally, renminbi use in international trade finance grew to 8.66 percent last October, from just 1.89 percent in January 2012, the Society for Worldwide Interbank Financial Telecommunication says.

This milestone made the renminbi the second most used currency for trade finance internationally, behind the US dollar, which has a share of 81.08 percent. About 18 percent of China's global trade is now denominated in renminbi, compared with less than 1 percent nearly four years ago.

At the same time, there are signs that the renminbi is moving toward becoming a global reserve currency, beyond just being a trade currency.

Hua Jingdong, vice-president and treasurer of the International Finance Corporation, says the UK government's announcement that it is issuing a renminbi sovereign bond is a milestone on the renminbi's journey to becoming a reserve currency.

"For them to tap into a new currency diversifies their funding resources. It gives them another avenue of funding. So it makes a lot of sense."

The renminbi's prominence as a reserve currency is growing, and this is partly reflected by the fact many central banks have invested in the International Finance Corporation's offshore yuan bonds, Hua says

But the timescale of the renminbi becoming a reserve currency will depend on how quickly the Chinese government liberalizes its capital account controls on the renminbi, he says.

cecily.liu@chinadaily.com.cn

(China Daily Africa Weekly 09/26/2014 page22)

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