London Gains First-Mover Advantage in EU’s Yuan Race (Mar 2013)


Source: Bloomberg Businessweek – London Gains First-Mover Advantage in EU’s Yuan Race

Notable excerpts:

London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global.

The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks…

The center of the world’s $4 trillion-a-day market for foreign-exchange trading is expanding ties with the second- biggest economy after yuan-denominated bond sales overseas surged 11-fold to 174 billion yuan since 2009 and trading in the currency more than tripled in London. China started pushing for the greater use of the yuan outside the mainland in 2010.

The swaps would allow the Bank of England to supply yuan to importers and other users when there’s a shortage of the currency. The “safety net” would have a “very strong psychological effect” in boosting confidence in trading yuan, Lintern said.

Since China started a pilot program allowing the use of yuan to settle international transactions in 2009, the proportion of its trade conducted in yuan has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most used in global trading along with the dollar and euro, HSBC forecast this week in a report.

While China is promoting a broader use of the yuan to match its rising status in the global economy, HSBC economists including Qu Hongbin estimated that it will take time for the yuan to become a dominant currency because the government doesn’t allow it to be freely traded. The People’s Bank of China limits the daily fluctuation of the yuan to 1 percent on either side of a reference rate set by the bank.

Central-bank Governor Zhou Xiaochuan said at a conference in Beijing on Nov. 17 that the bank’s next step in overhauling the foreign-exchange system will focus on convertibility.

To become a global currency requires full convertibility,” the HSBC economists wrote in their report. “Although this will be done gradually, Beijing policy makers are now more confident than ever about speeding up the process.”

China has signed currency-swap contracts totaling 2.4 trillion yuan since December 2008 with 19 countries and regions, including Hong Kong, Australia, Turkey, Brazil and South Korea, according to data from the People’s Bank of China website.


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