Into the Premier League – London and Renminbi internationalisation

Gregory Chin - Position, Institution

London’s ambition is not only to be ‘a’ hub for the international use of the Renminbi (RMB), but ‘the’ hub for the European economy, the so-called ‘Western hub’ for the RMB.

Some of the most prominent banks in the City of London, especially those geared to emerging markets and which also have a strong presence in Hong Kong, are looking beyond Europe, and eyeing how to link from London further westward to North and South America, southwards to Africa, and with the Gulf states in between – in short, to offer 24 hours a day, 7 days a week, RMB services.  This is no small ambition.

London surely has some structural advantages. It is the largest foreign exchange trading market in the world, with an average daily turnover in traditional foreign exchange market transactions (spot transactions, outright forwards and FX swaps) totalling US$4.4 trillion in October 2012.  This accounted for 37 per cent of global foreign exchange trading at that time.  Twice as many dollars are traded on the foreign exchange market in the UK than in the US, and more than twice as many euros are traded in the UK than in all the euro-area countries combined.  Worldwide, foreign exchange is the most traded financial market, and London has captured a growing share of this market.

The British capital handled 62 per cent of RMB trading conducted outside of China and Hong Kong in October 2013, according to data from SWIFT, the global payments company.  At that time, volumes in London were around US$5 billion per day, up from about US$2.5 billion in October 2012.  However, in June 2014, the business media in Asia reported that Singapore overtook London as the leading RMB trading hub outside of China and Hong Kong, regaining some of its lost share.  Singapore also offers a number of advantages as an offshore RMB platform.

Nonetheless, many analysts suggest that London’s standing as the main global centre for currency trading for the dollar and euro means that London will have a strong role to play as an RMB trading outside of Hong Kong.  According to one bank that caters to emerging markets, RMB trading in Hong Kong has continued to rise, from US$8 billion in daily volume at the end of 2012, to as much as US$13 billion by June 2013.  Overall trading volumes for the RMB rose 113 per cent in 2013 and, according to SWIFT, overtook the Swedish krona, the South Korean won and the Russian rouble in the tables of the global league.

London offers a number of other top-tier global market advantages.   The major global banks are all active in the City, with London being a leading transaction centre for 250 foreign and UK-based banks.   London is in the European time zone and handles the financial services for many European exporters and importers, as well as providing trade-related foreign exchange business for banks that are based in other European powerhouses, including German banks.   Indeed, in terms of time zones, London is arguably mid-way between Asia and the Americas, and has strong ties to the financial centres in the Gulf.   London is thus the regional or global headquarters for many European banks.  The City can also boast strong asset management skills, a highly developed financial e-infrastructure, a strong rule of law and legal systems, and English as the natural language of business.  Additionally, London has strengths in trading generated by prime brokerage, investment banking and hedge funds, all of which are areas of importance to London’s position as a global financial centre.

In essence, London’s upgraded role in RMB internationalisation opens the potential for the RMB to move into the veritable ‘Premier League’ for international currency trading (though there is still some way to go, when RMB trading volumes are compared to the dollar and euro).

Yet, although London has certain structural advantages, it also faces competition.   Hong Kong is the furthest ahead.   Singapore has taken key steps recently, including the launch of its RMB clearing bank (Industrial & Commercial Bank of China) a year ago, and seen significant growth in its RMB market. Taipei is catching up quickly, with its fast-expanding RMB deposit base.  And, closer to home, London faces stiff competition from Frankfurt, Zurich, Luxembourg and possibly Paris.  Pretoria has recently joined the ‘RMB race’   China has offered to set up bilateral currency cooperation agreements with economies in Africa and its central bank has already signed such agreements with Brazil and Argentina.   Chile, Peru and Mexico may not be far behind.

One way to mitigate this competition (to some degree), and to offset the potentially destabilising effects, is for the respective offshore RMB centres to communicate with each other – and the People’s Bank – to try to provide a degree of coordination between what are, currently, largely discrete RMB offshore centres.   Given the capital controls that remain over the flow of RMB internationally, these offshore financial centres share an interest in seeing their offshore pools of RMB  integrate gradually into a larger global pool of RMB, rather than remain as smallish, divided pools of RMB, confined to flow through separate offshore RMB centres.  Except for perhaps Hong Kong, the rest face the risk of limited RMB liquidity.  An increasingly global pool of RMB would help to ease the liquidity concerns, overall, for the offshore centres.

What could this mean?  To the degree that we see significant advances in RMB internationalisation via the City of London, as well as the continued growth of Singapore, Taipei, other European financial centres and, of course, Hong Kong – as well as the integration of the various pools of offshore RMB – then we will no longer be talking only about a regionalising or internationalising RMB, but rather the globalising of the RMB.