RMB swap deal suggested to London

Move set to strengthen London's position as offshore trading hub

The United Kingdom should explore the possibility of setting up a renminbi swap line with China's central bank to realize London's potential in offshore renminbi trading, said a former adviser to the People's Bank of China.

While London has natural advantages in terms of its time zone and global financial connections for renminbi trading, the Bank of England should further boost business confidence in renminbi trading through a swap arrangement with China's central bank, Xia Bin, counselor of the State Council, said in London on Wednesday.

Under a swap agreement, central banks agree to exchange each other's currency and can then lend the money out to domestic banks in cases of emergency. China already has currency swap agreements with 18 countries, but not with the UK.

"This swap agreement could start with a small quantity, and a short time frame, but I believe the agreement itself is important as a signal to boost market confidence. And this is the only way to drive forward London's development as an offshore renminbi center," said Xia.

The Bank of England's position is that if the swap agreement is "necessary, it will certainly consider it", said Mark Boleat, policy chairman of the City of London Corp, which oversees Britain's main financial district.

London is competing with Singapore, Tokyo, Taipei, Luxembourg and Kuala Lumpur to become an offshore renminbi-trading hub, a status currently enjoyed only by Hong Kong.

London's efforts received a boost in September last year when the Chinese government welcomed a British private-sector led initiative to develop an offshore renminbi hub in the city.

The UK Treasury has since established an arrangement with the Hong Kong Monetary Authority to hold a biannual meeting to develop London's renminbi liquidity.

The second Hong Kong-London Forum concluded in London on Thursday. Bankers attending the forum said they thought liquidity had improved since the inaugural meeting in Hong Kong in May.

Cross-border trading of renminbi has expanded fourfold since August 2010 to almost 200 billion yuan ($32 billion) in October, Euroclear Bank SA said in a statement on Wednesday, citing Hong Kong Monetary Authority figures.

Another boost to liquidity was the first ever renminbi repurchase agreement between banks in Hong Kong and London, also announced this week.

The repo was carried out between UBS AG in London and HSBC Holdings Plc's Hong Kong branch, with the Hong Kong Monetary Authority managing the collateral, Euroclear said in a statement.

Candy Ho, HSBC's head of renminbi business development in Hong Kong, said the repo allowed HSBC to lend its renminbi in Hong Kong to UBS in London, where the liquidity for renminbi is smaller. She said that the repo as a renminbi product helps deal with the risk of fragmented liquidity.

"Hong Kong has the most liquidity for renminbi, but there have also been a lot of renminbi transactions coming through different parts of the world. This could lead to pools of renminbi funds being segregated, which could cause a liquidity squeeze in a particular market," she said.

"By reducing the risk of fragmented liquidity, and allowing funds to flow between different renminbi centers, overall offshore liquidity for renminbi will increase," she added.

Commenting on the discussions on a potential renminbi currency swap, Ho said the key advantage of such an arrangement is to boost corporate confidence, as a swap will allow London to tap into China's onshore renminbi liquidity if needed.