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| Donald Workman, executive chairman, RBS Asia Pacific |
Since the City of London announced in April last year its intention to become a centre of business denominated in RMB, market makers, including RBS, had urged the BofE to open a RMB swap line with the People’s Bank of China (PBoC). PBoC had signed a total of 19 swap lines with central banks including those in Singapore, Australia, Turkey and the UAE, although none of these were in G7 countries. 'This is good news for London, good news for UK banks and good news for UK companies.'
During a visit to Beijing in February, recently retired BoE Governor Mervyn King finally started discussions with his equivalent, Governor Zhou Xiaochuan, on a three-year GBP/RMB currency swap agreement. In late June, a CNY200 billion swap was signed. This is good news for London, good news for UK banks and good news for UK companies. It is even good news for European companies that can 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 companies first advantage in benefiting from business opportunities in an economy that is still growing at close to 8 per cent annually.
The volume of RMB transactions – trade financing and investment banking activities denominated in RMB – has grown substantially in the UK, albeit from a low base, as China has accelerated the internationalisation of the currency. In the first five months of this year, the RMB import/export financing volume increased by 71 per cent compared with a year ago, RBS data show. The RMB is now ranked as the 13th biggest world payment currency, according to SWIFT’s RMB tracker.
The swap agreement will actually act as an insurance policy. It will only be used in the unlikely event of a generalised offshore liquidity shortage of RMB, when the BofE will be able to tell UK banks that it stands ready to help as the lender of last resort.
So what difference does a stand-by swap line, rather than activated swap line, actually make? In short, it gives 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.
Just as importantly, the swap line means UK banks can seek RMB funding from the BofE during their own time zone, without waiting for Asian markets to open.
There is also a good precedent of a swap line being used. Earlier this year, the Bank of Korea activated its USD59 billion line, accessing CNY62 million to help domestic traders make RMB payments.
Like any good insurance policy, we sincerely hope that the UK will never actually need the swap line agreement, but it is comforting to know it is there.
The agreement is also recognition of the importance of London, among European cities, in the internationalisation of the RMB and is another critical step on the road to designating London as an offshore centre for RMB trading.
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