BOE to Sign Agreement With China on Yuan Clearing Next Week

Mar 26, 2014 1:15 pm ET

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March 26 (Bloomberg) -- The Bank of England and People’s Bank of China plan to sign an agreement next week to enable the clearing and settlement of yuan transactions in London as the U.K. seeks to become an offshore hub for trading the currency.

An initial agreement stipulating cooperation between the central banks will be signed March 31, the U.K. Treasury said in an e-mailed statement today. The accord will be the first of its kind outside Asia, according to Chancellor of the Exchequer George Osborne, who said he is looking forward to the appointment of a clearing bank soon.

“Other Western countries will follow, but London now has the critical mass of infrastructure, helping to put Britain at the front of the global race,” Osborne said in the statement.

London is competing with European cities, including Paris, Frankfurt, Zurich and Luxembourg, to lure Chinese investment by becoming centers for yuan trading. The BOE in June became the first central bank in Europe to establish a currency-swap facility with the PBOC, supporting yuan traders by providing liquidity when needed.

More than 60 percent of yuan payments outside China are made in London, the Treasury said, citing SWIFT data. London asset managers can invest directly in Chinese stocks in the currency, unlike fund managers in other Western nations.

Boosting Links

Prime Minister David Cameron and Osborne have sought to boost trade with emerging-market economies, with both leading business delegations to China in 2013. Cameron and President Xi Jinping discussed cooperation between the two central banks in a meeting on sidelines of the Nuclear Security Summit in the Netherlands March 25.

“This is a positive step and is further evidence of the strong links between the BOE and the PBOC, underlining London’s importance in the internationalization” of the yuan, Jose-Luis Guerrero, global head of markets at HSBC Holdings Plc, said by e-mail today.

In December, the yuan overtook the euro to become the second-most used currency in global trade finance after the U.S. dollar, according to a report by HSBC, e-mailed today. It will become fully convertible in the next two to three years.

In the past two years, the offshore yuan has expanded beyond Hong Kong with deposits, trade settlement and bond denominations in Taiwan, Singapore and London. There are now more than 1.3 trillion yuan ($203 billion) in deposits across these markets, excluding funds invested in offshore bonds, HSBC said.

Frankfurt Rivalry

Osborne did not say when the clearing bank may be appointed. A London clearing bank would complement the main clearing and settlement infrastructure in Hong Kong by supporting efficient transfer of funds in the Western time zone, the Treasury said.

Xi may sign a letter of intent to establish Frankfurt as a trading center for yuan during a visit to Germany, WirtschaftsWoche magazine reported March 22, citing finance officials it didn’t identify. Xi is on a four-nation tour of Europe this week and is scheduled to meet German Chancellor Angela Merkel in Berlin on March 28.

The European Central Bank and the PBOC agreed to establish a bilateral currency swap line last October. China, the world’s second-largest economy, has similar agreements with countries including Australia, Turkey, Brazil, South Korea and Malaysia.