Victory in battle to bring renminbi market to City

EXCLUSIVE

THE CITY has taken a major step towards becoming the first offshore trading centre for the Chinese renminbi after the FSA began work on loosening up regulations for Chinese banks, City A.M. can reveal.

Following moves by HM Treasury (HMT) to push the issue up the agenda, the FSA has kicked off due diligence on a proposal from Chinese banks that could exempt them from regulations preventing the movement of large amounts of money to China.

The Treasury has been keen to speed up the process as part of a major charm offensive to lure Chinese trade through London rather than the Eurozone. The goal is to set up a 24-hour renminbi market in the UK.

But it is fraught with hurdles both because of Britain’s ultra-strict regulators and China’s reluctance to cede control over its currency.

The FSA’s move follows reassurance from Chinese regulator, the China Banking Regulatory Commission, that the UK subsidiaries of its banks will adhere to certain limitations on their movement of money out of Britain.

Currently, the rules impose strict caps on the amount of exposure a bank can build up to one single counterparty if that entity is not in a state governed by Basel Committee rules.

In effect, it means that a UK subsidiary of a Chinese bank such as Bank of China UK or China Construction Bank could accrue deposits of renminbi abroad but would be unable to get it all back to their parent company in China to invest it.

They need the FSA to give a nod to a larger-scale movement of cash back to Beijing as a precursor to establishing a renminbi market in London. The FSA’s stringent adherence to the rulebook risked damaging the City because Chinese banks were beginning to simply route their trade through EU countries that apply the rules less strictly.

Banks such as HSBC and Standard Chartered have lobbied hard for the UK to loosen its rules to avoid losing out to rivals on the continent.

The problem has built up because companies outside China are increasingly keen to use the renminbi, causing seven per cent of Beijing’s external trade to be settled in the currency versus one per cent just a year ago.

An HMT spokesman said it was working on “any regulatory or infrastructure issues that need to be addressed”.