Chancellor George Osborne wants London to become a western hub for renminbi tradingReuters
After placing such high importance on the UK's status in international Renminbi (RMB) clearing and trading, the government has suffered a number of setbacks in recent months.
This week, statistics from Swift, the international payments company, showed that Singapore has overtaken London as the number one offshore RMB clearing centre.
In March, the Bank of England announced that it had reached an agreement with the People's Bank of China – PBOC, its Beijing-based equivalent – that would see London become the world's first non-Asian clearing hub for foreign trade of the RMB currency itself.
However, hours before London was due to ink the agreement, Frankfurt steamed in ahead of it, sealing a deal that allowed the Deutsche Bundesbank to clear offshore RMB trade. It was a nominal victory, but one which will have resonated around Whitehall nonetheless.
Late last year, the Export-Import Bank of China, a key government agency that helps fund China's international trade, opened its first overseas branch, eschewing major financial centres in favour of Paris.
Financial hubs across the world are attempting to cash in on China's early efforts to internationalise its currency and despite recent events, London made a promising start.
On a trade mission to China last year, chancellor George Osborne said: "The Chinese currency, the renminbi, is not terribly well known in Britain at the moment. But over my lifetime I think it's going to become almost as familiar as the dollar, and I want British businesses involved in trading it, in investing it."
In October 2013, Osborne announced plans to make London a global hub for RMB, also known as the yuan, removing barriers to Chinese banks doing business in the City, and announcing new investment quotas.
In April 2012, HSBC raised the first overseas RMB-denominated bond in London, valued at RMB2bn (£198mn). In the same year, London overtook Singapore as a RMB payments centre, but this trend has now been reversed.
“The renminbi is not terribly well known in Britain at the moment. But over my lifetime I think it's going to become almost as familiar as the dollar”
- Chancellor George Osborne
Tiny Singapore has seen a growth in RMB payments of 375% in the year to March, taking 6.8% of the market. "Ever since last year's nomination of ICBC as a clearing bank in Singapore, we have been expecting the Singapore RMB payments flow to accelerate, especially as Chinese companies use it as a hub to reach ASEAN countries," said Claus Kwon, head of securities markets at Swift in a statement.
While both Britain and Germany's central banks have secured agreements with the PBOC to trade the RMB currency, they've yet to nominate a domestic bank to do so. If they're to capitalise on RMB growth, both countries need to hasten the nomination.
Even then, the success of their offshore RMB trading hubs will depend on the regulation they insist upon: will Chinese banks operating in London be subject to the same transparency requirements as domestic banks? Will such rulings act as a deterrent to Chinese doing business? Should any country bend the rules to suit Chinese investors while pummelling their own financial sectors?
When discussing RMB overseas payments, context is required. Yes, the potential is huge, but it is still very early days. UK chancellor George Osborne's prioritisation of the currency is understandable, but it is arguably premature.
The vast majority of the currency's overseas clearing (72.4%) happens in Hong Kong. The RMB is growing in global importance, but is still well short of the kind of growth which would back analysts' predictions of it becoming a global reserve currency.
It is now the world's seventh-ranked global payments currency, with a 1.62% share of global payments. That's up from 1.42% in February, but still short of peripheral currencies such as the Canadian and Australian dollars.
The feeling among many analysts is that the west stands to benefit more from RMB internationalisation than China does, at least in economic terms.
London, Frankfurt and Singapore all hope to earn from payment fees accrued from RMB-denominated payments, but they may have to wait to reap large benefit.
"Our message to both sides, London and Singapore, is don't get too excited. China is under no economic pressure to liberalise, it is a net saver rather than a net borrower. It still has enough savings to fund investment," Qinwei Wang, China economist at Capital Economics told IBTimes UK.
The PBOC still retains tight control over capital flows. If China is to loosen up capital flows, then it would need to have a more secure domestic financial market, offering more freedom to private banks, loosening interest rates and allowing fluctuations in the exchange rate.
All of these are on the agenda, but will move slowly, as Beijing proceeds cautiously. Investor interest in the RMB is likely to be sparked in earnest as the reforms near completion, which could be a decade down the line.
The chatter over RMB will escalate, fuelled by monthly reports citing its incremental growth. But those that are hoping to see tangible benefit from the currency's rise need to be willing to play the long game.
