Bond issue bodes well for globalized RMB

UK seeks to strengthen ties with China

The UK will soon become the first overseas country to issue bonds denominated in China's currency. UK Chancellor of the Exchequer George Osborne announced the news at the end of a Sino-UK investment summit in London on September 12.

Osborne said the issuance shows the UK recognizes the rising prominence of the renminbi in global finance, including its potential as a reserve currency, according to media reports. Although no specific timetable has been released, Osborne said he expects the first renminbi-denominated bonds to be issued in the UK before the end of the year.

The UK's move will contribute toward the internationalization of the renminbi, whose function is expected to expand from a payment and investment tool to a reserve currency in the offshore market. With the rising role of the renminbi in global finance, the UK's move will help strengthen London's position as a global financial center. Indeed, the UK has recently been supportive of strengthening financial links with the world's second-largest economy partly because of its own weak economy.

The UK's economy has been impacted by the Scotland's?independence vote, which has pushed some investors to withdraw capital due to concerns over economic uncertainties. In August, nearly $27 billion in capital left the country, the most since 2008, according to London-based consulting company CrossBorder Capital. It's quite a reversal from the $8.9 billion that flowed into the UK in the same month last year.

Morgan Stanley said recently the UK is in the midst of the largest equity sell-off on record, Reuters reported. Under these circumstances, strengthening financial ties with China could be a way to support the UK's economy.

With the rising position of the renminbi in the global currency market, more and more countries are showing their interest in the currency. Currently, more than 50 central banks are investing part of their foreign-currency reserves in the renminbi onshore or offshore, according to a story written by Jukka Pihlman in August. Pihlman is the managing director and global head of Central Banks and Sovereign Wealth Funds at Standard Chartered. Even European central banks have been allocating reserves in renminbi.

It's not surprising that the UK's government is so supportive of renminbi internationalization. London is competing with other cities like New York and Singapore as a global financial center. Obviously, it's beneficial to strengthen London's role in global finance by grabbing up more of the offshore renminbi businesses.

In fact, London has been trying to establish more links with offshore renminbi businesses. In June, China Construction Bank, China's second-largest lender, became the first clearing service provider for renminbi trading in London, which is helpful to secure London's position in foreign exchange trading.

Also, on September 8, UK financial regulators officially allowed?Industrial and Commercial Bank of China, China's largest commercial bank, to open a branch in London. The branch is expected to provide support for Chinese companies investing in the UK, which is going to boost the economic and trade connections between the two countries.

Besides these developments, China Development Bank, a State-owned policy bank, announced Monday that it had issued 2 billion yuan ($325.5 million) in renminbi-denominated bonds in London, which was the first time the bank issued quasi-sovereign renminbi bonds in the London market, according to the bank's statement.

The developments show that London is expanding it ties with offshore renminbi businesses. Singapore has overtaken London as the largest clearing center for offshore renminbi, according to a report released by the Society for Worldwide Interbank Financial Telecommunication in April.

These international financial centers are in a race to share more of the offshore renminbi market. Certainly, London has advantages as the largest foreign exchange trading center in the world. Establishing an offshore renminbi center in London is also good for the development of renminbi internationalization. Consequently, further cooperation between the two countries will benefit both sides.