London calling

The bulk of offshore renminbi liquidity is still concentrated in Hong Kong, but the UK has a strong hand to play in the contest to become a global trading hub.

The symbolic red carpet laid out for Chinese vice premier Wang Qishan on his visit to London in September 2011 might as well have been made of renminbi notes. During that trip, UK Chancellor George Osborne spelt out his ambitions for the city to become one of the world’s major trading hubs for the renminbi, with the backing of his Chinese guest.

“We will work together to support the market’s further development. In particular, we agreed to collaborate on the development of renminbi-denominated financial products and services in London, and our regulators stand ready to support this growing market,” said Osborne at the time.

Six months later, those promises had become more bullish.

“We are the natural home in the West for those who want to invest in the Chinese economic success story,” he said in April 2012 at the launch of the City of London’s own RMB initiative with the support of global and Chinese banks.

“And it is natural that when Chinese banks look westwards they choose London as the hub for RMB in the West, given London’s pre-eminence as a financial centre, and its expertise in areas such as foreign exchange and bond issuance.”

More than 12 months on, however, it is clear that the market has not developed as fast as some had hoped.

Deposits in the currency have yet to take off and, in fact, shrank rapidly during the first half of 2012. Barclays analysts estimate the liquidity pool of renminbi in London at around Rmb100bn (US$16.3bn) in 2012, similar in size to that in Singapore.

Only a handful of companies have targeted UK investors with renminbi bonds. BP, HSBC, Banco do Brasil and ANZ have all issued renminbi-denominated Dim Sum bonds in London, but bankers admit the city has yet to live up to the early hype on its potential as a funding market.

HSBC’s Rmb2bn 2.875% three-year bond, launched in April 2012, was hailed as a landmark, with the bank placing 60% of the notes to non-Asian accounts – ahead of its own target of 50%.

“What was most pleasing was the follow on. Sell orders from Asian accounts were placed predominantly with European private banks. The deal helped raise awareness of renminbi products and helped promote international ownership,” said Paul Gooding, head of European RMB business development at HSBC in London.

Few have followed suit, however. Cross-currency swap rates have dampened the appeal of the renminbi for companies looking to swap it back into their own functional currencies. Still, the renminbi’s appreciation against the euro has drawn some regional funds – especially private bank clients – into Hong Kong-led offerings.

“We haven’t yet seen as many issues come via London as we would have anticipated. However, the proportion of non-Asian participation in offshore RMB deals has risen significantly since the HSBC deal,” said Gooding.

The HSBC issue was the first renminbi bond to be quoted and traded on the LSE’s new electronic ORB platform, seen as a key step in driving participation from European retail investors.

That initiative, however, has failed to spark, and bankers are not expecting other issuers to use the format for the time being as retail investors remain more focused on equities.

UK banks currently conduct renminbi businesses via Hong Kong’s clearing infrastructure, but hopes are high that the country will soon get its own renminbi clearing bank – a privilege granted so far to Hong Kong, Macau, Taiwan and Singapore.

In trade financing, London is already becoming established as an international hub. The UK already accounts for the biggest proportion of international renminbi, or CNH, payments outside of Hong Kong and China, according to SWIFT, with 3% of the global market. If London can press home its first-mover advantage to capture a big share of European trade financings, the number will surely grow: the eurozone is China’s largest trading partner, accounting for 15% of the PRC’s trade in 2012.

Geographic advantage

“London has a strategic geographic advantage – it serves as a financial link between China and ‘the west’, including Europe, the Middle East and North Africa, and the Americas,” said RBS analysts Tiffany Qiu and Louis Kuijs in a recent note. “London will lead the offshore RMB business in Europe, due to its traditional financial-centre advantage, but it may also face competition from Paris and other developed cities.”

One recent development that will strengthen London’s hand is the promise of a renminbi/sterling swap line between the Bank of England and the People’s Bank of China. Discussions were announced in February, and a final agreement is pending, but expectations are of a Rmb450bn renminbi swap line, the biggest yet.

“A renminbi/sterling swap arrangement will help to increase the confidence of participants in the CNH market. This deal will be the first such agreement with China by a G7 central bank,” said Mark Boleat, policy chairman of the City of London and head of the steering committee for the RMB initiative.

London has yet to release renminbi-trading data for the second half of 2012, but the most recent numbers show a rapid growth in forex volumes, with average daily volumes of spot forex at US$1.7bn in the first half of last year, up 150% from 2011.

Following China’s recent commitment to open its capital account by 2020, UK bankers say they are focusing on more than just the next headline Dim Sum bond, such as advising clients on gaining access to onshore investments and working to deepen trading liquidity.

The real prize, of course, is a slice of the global renminbi pool once China’s domestic markets become international: outstanding renminbi bonds in the offshore markets reached about Rmb375bn as at the end of 2012, compared to Rmb25.5trn onshore.

To see the digital version of this report, please click here.