The Chinese currency is fast gaining weight worldwide and becoming a key topic of conversation for bankers.
THE fashionable youths in hot pants flocking to high-end department
stores in
London and bankers in dark suits walking in and out of
skyscrapers in the financial district have one thing in common, a
growing interest in the Chinese currency.
During the recent
holiday to celebrate the
Diamond Jubilee of Queen Elizabeth II, Harrods,
a department store known for its ties with the British royal family,
launched its own Sina Weibo, a popular Chinese social media platform, to
attract more Chinese customers. Shoppers can find “the very latest,
limited edition and exclusive products”, with Hermes, Chanel and Louis
Vuitton among the most popular brands, according to the store’s
spokesman.
More than 100
UnionPay payment terminals in the store
also help to make Chinese shoppers feel more at home. Through the
machines, part of China’s unified bank card network, Chinese visitors
can pay for their purchases with the same cards they use at home.
Hear,
hear: A man walking past the London Stock Exchange in London. London is
now a yuan offshore trading centre, which will help both Chinese and
European business people to avoid foreign exchange risks. — China
Daily/Asia News Network
A few streets from Harrods, a
billboard featuring a green jade dragon shaped like the yuan symbol
stands outside a bank. The ad reads: “A new global currency is emerging.
Be part of it.” The commercial is for HSBC, a bank rooted in the silk
and tea trade between China and Britain in the 19th century.
The
UnionPay terminals, the jade dragon advertisements and the shops on the
streets of London offering exchange services between the British pound
and the yuan are the tip of the iceberg in the biggest story in the
financial markets today: the internationalisation of the Chinese
currency.
As people search for a bright spot amid sluggish
economic growth in the West, beset as it is by the
European debt crisis,
companies, investors and financial institutions are increasingly
focused on the yuan. From Beijing to
Hong Kong, Tokyo to London,
policymakers and businesses are part of the push.
There are
several forces driving this move, both at home and abroad. The People’s
Bank of China has made several moves this year to liberalise the
exchange rate; George Osborne, the
UK chancellor of the exchequer, took
the initiative to develop London into an offshore trading centre for the
yuan earlier this year; and this month, the yuan became convertible
with the Japanese yen under an agreement between the Chinese and
Japanese governments.
“All of it demonstrates that the
Chinese
government is pushing forward the internationalisation of the yuan and
encouraging the use of yuan offshore. That will help the global economy
in many ways,” said Adam Tyrrell, head of European capital markets for
Standard Chartered in London.
Greenback to redback
These
initiatives will have a profound influence on the development of trade.
For instance, China and Europe are each other’s largest trading
partners, but, up till now, the bulk of that trade has been settled in
the US dollar. If a Chinese company buys pork from a UK company, it does
not buy and sell in yuan, the pound or the euro. It settles in dollars.
That
paradox is changing. Now the same pork company can open a yuan account
at a British bank such as HSBC or Standard Chartered, or a Chinese bank
that operates in Europe, such as Bank of China or Industrial and
Commercial Bank of China, and can then invoice the goods or settle the
deal with its Chinese clients in their national currency.
The
advantage of this is clear: Settling in yuan helps both sides to avoid
foreign exchange risks and reduces transaction costs. For instance, in
2008, many companies in southeast China had to lay off workers and close
factories because they were losing money through currency appreciation.
That
situation would have been different if the contracts had been signed in
yuan, because the agreements would have a fixed value no matter what
the change in the exchange rate.
The initiative can also benefit
companies outside the European time zone, given London’s position as the
world’s foreign exchange centre. “The beauty of London is not just
about London,” said Patrick Law, Hong Kong-based managing director and
head of trading for Greater China at Barclays. “If you look at the
London time zone, it covers both the northern and southern hemispheres.”
And that means it will also help facilitate business between China and
Africa and the Middle East.
“Africa is a very interesting market
to look into because China and Africa have a lot of business together,”
Law said. He added that Barclays, a bank with strength in commodity
trading, began to conduct trade between the South African rand and yuan
from April.
Uncle Sam to dim sum
The
internationalisation of the yuan will also offer a new platform for
companies and investors looking for alternative methods of financing.
The
“dim sum bond” got its name from delicacies in
Chinese cuisine such as
spring rolls, shrimp dumplings and steamed buns. The name has been
appropriated for fixed income denominated in yuan and was started in
Hong Kong when the city became the first offshore centre for yuan
trading. The bond has become increasingly popular outside Asia and grew
rapidly in Europe last year, according to Standard Chartered’s Tyrrell.
British
banks were involved in five dim sum bond deals with European companies
and financial institutions last year. It has also been involved in three
client deals so far this year, according to Tyrrell: “Over time, as the
yuan is used more, more European corporations and financial
institutions will be interested in transacting in yuan, either for their
China business, when they can remit onshore, or as a way of
diversifying their investor base.”
The motivation for getting
involved in dim sum bonds is also changing, he said. When the yuan
market first developed offshore, a lot of investors were looking for a
currency play rather than a bond play. At first, investors were looking
to invest in the currency because they thought it was going to
appreciate.
“Over time, it is developing into a more mature bond
market,” said Tyrrell. “It will tend to be more driven by traditional
bond market influences.”
Chances and problems
That’s
particularly true this year, because of the fragile state of the global
economy. If the investor sentiment is not there, there will be fewer
bond issuances, according to Tyrrell. “There is definitely momentum in
the yuan. It will not stop. It will grow,” he said.
Given the
fact that the yuan is still not fully convertible, there is still a lot
of work to be done to encourage people to hold it and conduct business
with it, as they do with dollars.
The main issue for London as it
attempts to develop into an offshore yuan trading centre revolves
around the lack of liquidity. That’s due to both a paucity of knowledge
about the yuan market and the limits of infrastructure to facilitate
trade flows.
“Without liquidity, we cannot grow the pie and make
the market more efficient,” Law said. “Everybody is definitely very
interested. The current situation is that people have just started
looking into it,” he said. “The involvement is still relatively small,
but the amount of interest is actually very high.”
Some observers
have suggested that the pool of yuan liquidity in London can grow
through a huge variety of sources. For instance, Standard Chartered
recently issued yuan-denominated European Commercial Paper to investors
in Europe.
“ECP is issued to investors. Then Standard Chartered
holds the liquidity in yuan and can use that for trade finance. This
will help to increase trade flows with China for European clients,”
Tyrrell said.
“As investors become more comfortable holding yuan, it will help build liquidity here.”
By Diao Ying, China Daily/Asia News Network