The move by the People’s Bank of China (PBoC) was announced in a statement on its website, following a visit by Chinese premier Li Keqiang to London to discuss bilateral trade with UK prime minister David Cameron.
“The direct yuan-sterling trade is good for forming a direct exchange rate between the renminbi and the British pound and reducing exchange costs,” read the statement.
No previous agreement existed to trade the two currencies directly. The two available options were to either use the US dollar as an intermediary currency – convert UK pounds into dollars and then into RMB – or trade RMB offshore, typically via Hong Kong.
It is already possible to trade nine currencies directly against RMB – quoted as CNY – including the US dollar, euro and Japanese yen.
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At present there are 10 market makers, according to Jinny Yan, director of RMB solutions for Europe at Standard Chartered.
“[Standard Chartered] did the first trading deal in CNY/GBP on the first day it was available,” she says. “It was very much in demand, [demand] started picking up straight away as soon as it was allowed.” Corporate demand
HSBC was one of the first market makers for RMB-sterling. David Pavitt, head of RMB development for EMEA at HSBC, says there has been demand for the new cross from UK businesses.
“Any UK company that is dealing with China and is actively involved with Chinese business would be keen to access it,” he says. “Volumes will increase as more people become familiar with it.”
He also anticipates the number of market makers in CNY/GBP will increase, and there will be more direct crosses between the Chinese currency and other currencies.
“It is inevitable that, as client demand increases, more banks will participate. As more banks participate, we will end up with critical mass and the market will begin to develop in its own right,” says Pavitt.
Direct trading between the two currencies is aimed at increasing the use of RMB in the UK and boosting trade and investment flows. It will benefit UK businesses in a number of ways, according to Michelle Price, associate policy and technical director at the UK Association of Corporate Treasurers.
Corporates currently trade via a cross rate with the dollar and are losing out on the buy/sell spread, but direct trading replaces this two-step process with just one trade.
Furthermore, the decision by the Bank of England to appoint China Construction Bank as a clearing house in London should also benefit UK corporates.
“The appointment of a yuan clearing house in London should also result in the cost of renminbi payments falling for UK corporates as the market and infrastructure develop closer to home, giving flexibility, more immediacy, certainty and bringing efficiency to the transaction workflow,” says Price.
Chinese businesses and British corporates based in China will also benefit from a reduction in FX risk, according to Standard Chartered’s Yan. Those that wish to convert RMB into sterling can now do so directly, rather than using the dollar as an intermediary, which cuts out the extra FX risk, she says.
Renminbi-appreciation path
Investors have poured into renminbi-denominated assets since 2011, when the renminbi qualified foreign institutional investor scheme was established in Hong Kong, giving investors access to Chinese shares and bonds. This allowed investors to gain exposure to the rapidly appreciating currency.
However, the renminbi has steadily dropped in value against the dollar during the past six months, falling from 6.04 on January 14 to a yearly low of 6.25 on May 28, as the PBoC has intervened to curtail hot-money inflows.
Yet investors should still look to invest in renminbi, because it will continue to appreciate over the long term, as China moves towards full convertibility of its currency, says Yan. She predicts USD/CNY to reach 6.09 by the end of the year.
Mark Johns, partner and manager of the renminbi bond fund at fund manager Stratton Street Capital, says the recent depreciation is not very large compared with other global currency movements, and overall volatility of the renminbi remains exceptionally low.