GBP Direct Conversion Will Enhance London As Europe’s RMB Center

The author is ANZ (The Australia and New Zealand Banking Group) Research

British Chancellor George Osborne kicked off a five-day trade mission to China yesterday. The two sides closed the following agreements today:

China and UK agreed on direct conversion between the RMB and GBP;

China will grant the U.K. RQFII (RMB Qualified Foreign Institutional Investor) license with an initial quota of RMB80 billion;

The Bank of England will also allow Chinese banks to set up wholesale branches in the U.K.

We think that today’s announcement is a natural progression following the currency swap agreement of RMB200 billion between the BoE and the PBoC signed in June.

Last week, the European Central Bank and the PBoC also signed a swap agreement of RMB350 billion. The RMB will now have a firmer footprint in the European market.

The direct conversion of GBP and RMB will further enhance London’s capability as an offshore RMB center. With the increasing presence of Chinese banks in London, the granting of RQFII license will strengthen and widen the platform for London to develop the offshore RMB bond market.

It will also allow onshore traders in China Foreign Exchange Trade System (CFETS) to fix their GBPCNY directly without the need to be bound by the daily USDCNY fixing.

At last, we noticed that European-based corporates have begun to use the RMB in their trade settlements. As China’s capital account continues to open and cross-border fund flows become easier, their appetite for raising RMB in London market will certainly increase.

(The article has been edited for clarity)

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