Bringing the renminbi to the City of London

FOLLOWING a two day visit to China, George Osborne yesterday announced that Britain had agreed to partner with Hong Kong to develop the City of London as an offshore trading centre for the renminbi.

Hong Kong is currently the only official offshore renminbi venue, but Osborne hopes to turn London into a second offshore venue with a similar success to its record as a eurodollar venue. “I think London stands every chance of becoming the major centre outside Asia for renminbi trading,” says Nick Beecroft, senior markets consultant for Saxobank. “London is already acknowledged as the premier FX market in the world and our time zone makes us ideally placed to be the predominant market after the end of Asia’s day.” Beecroft adds that Osborne’s joint work with Hong Kong on FX clearing, combined with Hong Kong’s agreement to settle their renminbi day to dovetail with London gives us a good start.

The existing currency set-up is a fairly complicated one, but it would be expected that the London renminbi would follow the Hong Kong system. The current arrangement was established following an agreement in 2003 between the People’s Bank of China and the Hong Kong Monetary Authority to allow Hong Kong banks to conduct business in renminbi. Alongside the offshore and the onshore renminbi, there is the dollar settled non-deliverable forward (NDF), as well as the trade-settlement exchange rate used by offshore corporations. The NDF curve acts as a futures curve, linking itself with the onshore renminbi market. In effect, there is one country with two systems, three countries and four yield curves.

Saxo is one of the handful of platforms that quotes the dollar-offshore renminbi, but it is not currently a widely traded pairing – though it does offer some exposure to the mainland, it is not a perfect proxy.

The success of the offshore renminbi, should it find a second home in London or not, will only really be guaranteed with a loosening of the current rigid currency controls maintained by the Chinese authorities. However, they have made repeated statements that they wish to move in this direction. “The time when the renminbi will be truly convertible, on both the capital and current accounts, lies some distance in the future – but maybe only five years,” says Beecroft. “By the end of this decade, the dollar-renminbi market will be the largest in the world.”