The Strategist

Why Yuan Cannot Settle in London

11/18/2015 - 14:52

The British authorities are trying to turn London into the main center of renminbi operations across all the West. However, although pace of renminbi trade is rising, shops and banks are in no hurry to convert business in the Chinese currency.

Aurelien Guichard
Aurelien Guichard
Xiao Tian, 38-year-old top manager of an advertising company in East China, was pleasantly surprised when saleswomen at expensive stores on Oxford Street talked to him in Chinese. However, they refused to take payment in yuan. On the other hand, the US dollar, euro and Japanese yen are welcomed in London shops, what makes life of American, European and Japanese tourists much easier.   

London and Beijing have applied considerable efforts for the first to become home for renminbi. During the state visit of President Xi Jinping in October, People's Bank of China placed bonds in London for the first time. The Chinese government also plans to sell renminbi-denominated government bonds there. The central banks of China and Britain signed an agreement on currency swap. Broker ICAP, the largest of working with dealers in the foreign exchange market, said that in the III quarter, volume of renminbi trading in London rose by 90% compared to the same period in 2014. Darryl Hooker, co-director of currency trading at ICAP, expects threefold growth in the next five years.

Apart from this, authorities of both countries want not only free renminbi trading. Besides, the governments dream about companies and individuals increasingly use yuan for credits, loans and currency exchange: this would make London (and the UK in general) a more comfortable place to spend money for the Chinese companies and wealthy tourists.

Wider dissemination of renminbi would also help the Chinese authorities implement their goal - to make it a global currency. On Friday, the IMF Managing Director Christine Lagarde and foundation staff approved inclusion of renminbi in reserve currencies basket (the decision still has to be approved by the IMF management).
However, four years after London and Beijing have launched the promo campaign for renminbi, it still occupies a small place in the business of British banks and companies. On the one hand, renminbi is still not a convertible currency, and on the other - the Chinese economy’s slowdown has made it less attractive. "Investors have adopted more rational approach to investments in the Chinese currency and assets," - says Rongrong Huo, Global Director of RMB and China strategy at HSBC Bank. The small number of investment objects holds them back as well, added he.   
Daily renminbi trade has increased almost six-fold at the London foreign exchange market - from $ 10.6 billion in 2011 to $ 61.5 billion in 2014, according to the administration of the City of London. Yet, this is only 1.8% of daily turnover. For comparison, the share of US dollars is 89%.  

 Deposits in the Chinese currency in local financial institutions increased from 14 billion yuan in 2011 to 20 billion yuan ($ 3.14 billion) in 2014. Also, RMB loans, issued by British banks for importers and exporters, increased from 17, 2 to 35 billion yuan ($ 5.5 billion) during the same period. However, the RMB trade finance volume is now lower than in 2013, when it amounted to 43 billion yuan ($ 6.7 billion). Most likely, it was affected by the decline in Chinese GDP growth and expectations of renminbi’s depreciation.

London is inferior to Hong Kong and Singapore, the other two major centers of renminbi trading outside of mainland China. For example, RMB deposits in Hong Kong amount to about 900 billion yuan ($ 141 billion) and in Singapore - more than 300 billion yuan ($ 47 billion).

Senior Chinese officials are assuring that they are going to continue mitigating foreign exchange controls and open the country's financial market. However, in recent months, the process has stalled amid slowing economy. Currency regulation should be "somewhat" liberalized for dissemination and wider use of renminbi, said Harriett Baldwin, Economic Secretary to the British Treasury. In addition, renminbi is not included in the usual Western banks settlement system for foreign currency transactions, which also limits its use.