China Begins RMB-Pound Direct Trading In Onshore Interbank Market

The People’s Bank of China (PBoC) has approved the China Foreign Exchange Trade System to start RMB and pound direct trading in the Chinese onshore interbank market.

The move is expected after the two countries agreed on the direct conversion between their currencies when British Chancellor George Osborne visited China in October 2013.

The PBoC will authorize China Construction Bank’s London branch to be the clearing bank in the U.K.

U.K. is China’s 12th largest trading partner, with bilateral trades reaching over US$70 billion in 2013. Trade growth between China and the U.K. increased 11% year-on-year in 2013, outperforming China’s total trade growth of 7.6% during the same period.

"We do not think the launch of direct conversion will materially affect the exchange rate of the RMB against the pound as onshore traders will likely continue to price the pound through the U.S. dollar," says a report by the Australia and New Zealand Banking Group (ANZ).

But the bank expects the transaction volume and liquidity condition of the pound in China to pick up gradually, similar to the case of the Australian dollar. The move could lay the foundations for London to nurture a Euro-Yuan market.

HSBC has received approval from the PBoC to be one of the first market makers for direct trading of the RMB and the pound.

HSBC is one of the most active participants in China’s interbank foreign exchange market. It was among the first banks appointed as market makers when direct convertibility of each of the Japanese yen, Australian dollar and New Zealand dollar was previously launched against the RMB. It was the first international bank to settle RMB trade in six continents and has established RMB trade capabilities in over 50 markets globally.