Tag Archives: offshore markets

London Expands As Offshore Yuan Center

Last year, the British and Hong Kong governments agreed to promote London as a center of trading offshore yuan. This week, some meat was put on the bones of that agreement with the issue of a three-year yuan-denominated bond in London. HSBC was the lead on the deal, the first so-called dim sum bond to be issued outside China. It raised 2 billion yuan ($317 million), mostly from European investors, and yields 3%. Demand from investors was so heavy that HSBC doubled the bond from its originally planned size.

Yuan-denominated deposits in London totaled 109 billion yuan at the end of 2011, according to a report commissioned by the financial district’s government and published to coincide with the launch of a working group to develop London as the western hub for offshore yuan business. The group includes HSBC, the biggest issuer of dim sum bonds in Hong Kong, and Bank of China.

London’s is a sufficient pool of liquidity to start supporting a bond as well as a foreign-exchange market, but it is still less than a fifth of the 566 billion yuan in renminbi deposits in Hong Kong as of February. Despite the strong push London is making, Hong Kong remains the leading offshore yuan market, as Beijing desires. Singapore and New York also have designs on the business but London has stolen a march on them.

China’s doubling of the yuan’s trading band and other recent financial reforms, including allowing banks to hold short dollar positions, raising the ceilings on foreigners’ equity and bond investments in China, and a trial of giving domestic Chinese investors more access to offshore yuan markets, are all part of Beijing’s drive to expand the international use of its currency that started in 2008. More optimistic financial reformers have pencilled in 2015 for full convertibility. The more cautious fear that would be a destabilizingly quick timeline, especially if GDP growth continues to slow.

If the on- and offshore interbank markets forge a close link, that could force the pace. However, the offshore market is still in its infancy. Baby steps are yet to be made. In June, Hong Kong plans to extend its yuan payments trading to overlap with London hours. For its part, London is working on setting up local yuan clearing and settlement systems, probably piggy backing off Hong Kong’s. More European banks are expected to follow HSBC’s lead in issuing dim sum bonds in London later this year, as are the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.

Other yuan-denominated investment products will likely follow. But how fast London, or any other financial center, can develop as a hub of offshore yuan trading, will ultimately be determined by how quickly Beijing opens its capital account and lifts its foreign exchange controls so there is a sufficient volume of internationally circulating yuan to support the business. At present for every yuan deposited outside China, there are 99 inside.

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China: One Currency; Two Yuans

London has made more than one fortune on the China trade, though they have not all ended happily. Whether the yuan will end up as the new opium is the question raised by George Osborne, Chancellor of the Exchequer as the U.K. calls its finance minister, who has been in Hong Kong to promote a scheme to make London the leading international center for trading in China’s currency. London and Hong Kong have been talking about how to do this since last summer. Osborne’s trip will continue the talks.

Chatham House, a think tank in London, has forecast that trade transactions settle in the currency would reach the equivalent of $1 trillion by 2020. Yet, while Beijing has been taking baby steps towards making the yuan a fully convertible currency, there is still a long, long way to go. It remains an aspiration as much as anything but also a hostage to the pace of financial reform, which, as we have noted before, is in stasis during the leadership transition. China may need to rebalance its economy away from export- and investment-led growth and towards domestic consumption, for which financial system reform is a necessary if not sufficient condition, but vested political interests stand in the way. For all the wishful thinking in some parts, the Chinese currency is far from displacing the dollar as the world’s reserve currency, or even having the standing of the yen or the euro in such circles.

If anything, the surprise is that the offshore market for yuan is as large as it is (yuan deposits in Hong Kong total the equivalent of $80 billion). Normally the deepening and development of domestic financial markets and the easing of capital controls is prelude not postscript. In China, the first two are so difficult that the third is the easier option, even if by having a government controlled onshore yuan market in China and market driven offshore yuan market in Hong Kong and London, China may well end up, not untypically, with one currency but two yuans.

London, of course, will be happy to take its skim off both.

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