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UK may be offshore China currency hub

Friday, January 17 14:21:59

After a patchy two years, London appears to be making headway in its drive to become Europe's main offshore hub for trading in China's currency, potentially delivering a big boost to its financial sector and the wider British economy.

China decided late last year to give UK investors the right to buy up to 80 billion yuan ($13 billion) of mainland stocks, bonds, funds and money market instruments directly using its currency, making Britain the first country outside Asia with such status.

Last week, the state-controlled Bank of China also sold a 2.5 billion yuan ($413 million) bond in London, the biggest issued in the currency - which is also known as the renminbi (RMB) - so far in the British capital.

"It is inarguable that London is the leading offshore RMB centre in Europe and I think it will pick up this year. The trends are strong ... it (London) is building on the strengths it has," said Wenjian Fang, chief executive of Bank of China UK.

China has relaxed controls over the last five years to establish the yuan as an international currency of trade and reduce its reliance on other currencies. The yuan is expected to become a leading so-called reserve currency, meaning it will be stockpiled by central banks, and be fully convertible by 2015.

It has already overtaken the euro as the second most important currency in trade finance, accounting for about 8.7 percent of that market last year from 1.9 percent at the start of 2012, according to payments firm Swift, although it is still a long way behind the U.S. dollar's 81 percent.

For countries that secure closer financial ties with China, the rewards are potentially enormous.

Firstly, they could get access to stock and bond markets in the world's second-largest economy that are worth between $3 trillion and $5 trillion each, and expected to grow rapidly.

Secondly, analysts expect the cash will flow both ways, with China increasingly looking to put some of its $3.6 trillion in foreign exchange reserves to use and planning to give Chinese investors easier access to foreign markets via its renminbi qualified domestic institutional investor (RQDII) scheme.

"China's outbound investment is predicted to become the third biggest globally by 2017, so everyone wants to see some of that," said Rongrong Huo, HSBC's head of RMB business development in Europe.

While London's position as the world's biggest foreign exchange and bond trading centre, Europe's financial hub and the home to Asia-focused banks HSBC and Standard Chartered give it advantages, others are snapping at its heels.

Luxembourg, Paris, Frankfurt and Switzerland, among its European rivals that also want in, have strong cases. Germany and France do more trade with China than Britain, and Germany is the only one of the largest five European countries using yuan for trade finance. (Reuters)