London calling China! World’s largest FX center set to clear renminbi

London has long held its status as the worldwide center for institutional FX, with the majority of the largest interbank FX dealers being located in the British capital.

Yesterday, it was revealed that the city’s FX industry is about to be opened up even further to renminbi liquidity, with the designation of China’s second largest lender, the China Construction Bank, as a clearing bank in London for the Chinese offshore currency.

Whilst trading with free market economies in Chinese renminbi (CNY) which is used on the mainland is severely restricted by China’s communist government, the Hong Kong-based offshire renminbi (CNH) is as freely available on all worldwide markets as any other currency, and has become a valuable means of conducting trade with China, as the currency is aligned with that of the mainland.

According to the Financial Times, the Chinese Construction Bank has been selected as the first entity to clear renminbi in Britain after previous expectations that its rival, The People’s Bank of China, would gain the privelege.

“This was a decision taken in Beijing – not in London,” said one of the Financial Times’ sources. “It’s kind of a matter of sharing things around.”

The UK is keen to defend its role as the main offshore renminbi trading centre outside Asia, but faces competition from Frankfurt and Luxembourg.

The change will allow investors to cut the risk from making overseas payments in renminbi, and should make trading the currency more efficient and liquid. It may also attract Chinese companies keen to invest in Europe, as well as making it easier for investors to gain access to China’s onshore capital markets.

Britain’s capital markets economy relies tremendously on substantial investments and trading activity with the Far East and the Middle East, as its own economy has been subjected to extremely difficult circumstances following the financial crisis of 2008 and 2009, leaving a substantial proportion of its population severely affected, and resulting in the collapse of most of the nation’s retail banking sector.

In addition, the national government has paid substantial sums in bolstering other European Union member states with catastrophic economies such as Spain, Greece and Ireland, resulting in a large national debt for the UK, and increased dependency on social welfare, appeasement by way of the promise of hard-to-sustain social programs, as well as a burden on the tax payer to bail out ailing financial institutions.

Incumbent Prime Minister David Cameron last year responded controversially to the burden on the state, and the lack of growth within UK industry, by opening up the London Stock Exchange to offer Islamic sukuk bonds, therefore providing a gateway for $320 million in Sharia compliant gilts from the Arabian peninsula to make their way onto the UK’s markets. At the time, Mr. Cameron stated publicly that “This government wants Britain to become the first sovereign outside the Islamic world to issue an Islamic bond.”

Whether this was a measure taken to provide more funds in order to generate domestic-market corporation tax with which to keep feeding the welfare system and appease voters in the advent of European elections without having to go down the pragmatic route taken by former French premier Nicolas Sarkozy in explaining that some very hard work will be required to restore the economy which in turn resulted in Mr. Sarkozy having been replaced by socialist president Francois Hollande, is perhaps a matter of opinion. That particular move, however, echoes London’s aim to facilitate renminbi clearing insofar as that it brings trading revenue to institutions from wealthy, although unaligned, nations without altering, for better or worse, the national economy at large.

Conversely, London’s interbank trading business has attracted overseas investment from China and the Middle East, with Russian liquidity also now readily available via TMX Atrium’s point-to-point connectivity between Moscow and London. With the addition of renminbi clearing, London’s sights are set where the real money is, which further distances itself from its own domestic business.

It was stated by the Financial Times yesterday that Britain was provided with a quota of 80 billion renminbi for investment in Chinese securities under the Renminbi Qualified Institutional Investor scheme which was established in Hong Kong. This provided a new level of accessibility as it could supersede the previous procedure of relying on London’s infrastructure to access renminbi clearing in Hong Kong itself.

By fending off other competitors for eligibility to clear renminbi, London positions itself among the ranks of Singapore and Hong Kong, both some of the world’s most poignant regions for institutional FX.


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