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| John McCormick, Chairman of RBS Asia Pacific |
Since the City of London announced in April last year its intention to become a centre of business denominated in renminbi (RMB), market makers, including RBS, have been urging the Bank of England to open a RMB swap line with the People’s Bank of China (PBoC). PBoC has signed a total of 19 swap lines with central banks including in Singapore, Australia, Turkey and the UAE. The largest was a CNY400 billion line with Hong Kong. During a visit to Beijing in February, BoE Governor Mervyn King finally started discussions with his equivalent, Governor Zhou Xiaochuan, on a three-year sterling / RMB currency swap agreement. This is good news for London, good news for UK banks and good news for British companies. It’s even good news for European companies that will be able to benefit from using London as a hub for RMB trading.
The fact that China has chosen the UK as the first among G7 nations to access a swap line gives the UK, and British companies, first advantage in benefiting from business opportunities in an economy that is still growing at close to 8 per cent annually.
While the bilateral swap lines PBoC has already established with other central banks are agreed on this stand-by basis, a good precedent was set earlier this year when the Bank of Korea (BOK) actually activated their USD59 billion line, accessing CNY62 million to help domestic traders make RMB payments.
So what difference could a stand-by swap line, rather than activated swap line, actually make? In short, it should give confidence to investors and companies who are currently nervous about using the lightly-traded RMB for cash management, trade settlement or debt financing because of concerns about accessing and disposing of the currency at short notice or in large sums. The agreement would effectively ensure that access to the currency would be there if needed.
At present, UK companies are reluctant to adopt RMB as a functional currency because of a lack of knowledge of the market, because of confusion around unfamiliar Chinese regulations and, in particular, because of the lack of market liquidity. They prefer to use foreign exchange, swapping sterling as needed to complete transactions and payments.
The fact that 98 per cent of RMB payments made in London in 2012 were for settling institutional transfers rather than trade, according to SWIFT data, shows how UK businesses need the reassurance that the swap line can provide.
To estimate the possible size of the BoE / PBoC swap line, it helps to look at the size of the agreements of other central banks compared with that country’s annual bilateral trade volume with China. The ratios for Brazil, Australia, Malaysia, Hong Kong and Korea range between 22 per cent and 38 per cent.
Considering a UK swap line is likely to increase London’s role as a RMB trading hub for European businesses, it is helpful to look at the ratio in Singapore, which is an equivalent hub in southeast Asia. While the swap line with the city state accounts for 73 per cent of its trade volume with China, as a member of the Association of Southeast Asian Nations (ASEAN), which also includes Thailand and Malaysia, it constitutes 13 per cent.
Let us assume the size of UK swap line is as high as 13 per cent of European/China trade volume, it requires a CNY450 billion currency swap between the BoE and the PBoC, which would make it the largest agreement with China yet. In addition, the BoE can invest a proportion of RMB obtained through the swap line in China’s interbank bond market.
Whatever the eventual size of the swap line between the BoE and PBoC, in the end, it can only open more opportunities for UK companies to trade more efficiently, effectively and profitably with China.
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