May 23 – The Bank of England and the People’s Bank of China are working towards a joint RMB/GBP currency swap line after the banks’ governors met earlier this year to discuss a reciprocal exchange arrangement.
According to the Bank of England, the agreement will initiate a three-year currency swap program designed to “finance trade and direct investment between the two countries,” as well as strengthen the financial stability of the currency markets. As a result, England will be the first G7 nation to have direct access to the RMB.
China already has existing currency swap lines with several of its regional neighbors – including Australia and South Korea – but a deal with England signifies a growing desire by China to have its currency fully utilized in international trade. In short, the arrangement will allow European companies to trade RMB swaps with the Bank of England –a positive situation for Chinese businesses.
Commenting on the benefits of this deal, Bank of England Governor Mervyn King said: “The establishment of a Sterling-Renminbi swap line will support UK domestic financial stability. In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the Bank will have the capability to provide renminbi liquidity to eligible institutions in the UK.”
The benefits of an RMB/GBP currency swap arrangement are not limited solely to the British financial markets, as China will also gain from the agreement. Chris Devonshire-Ellis, founding partner and principal of Dezan Shira & Associates, believes that the arrangement will be beneficial for both countries.
“[The arrangement] gives China access not just to the stability of the British banking system, but also access to European markets,” comments Devonshire-Ellis. “It also helps open up the Chinese market to British companies that will now find it more convenient to settle trade in renminbi.”
The reciprocal currency swap agreement is viewed as a positive step forward for China as it seeks to internationalize its currency. Until recently, the RMB was pegged to the U.S. dollar and is still underutilized as a settlement currency for cross-border trade.
In 2004, China set up its first offshore RMB clearing bank in an effort to increase international demand for the currency. Since then, the People’s Bank of China has been working to expand the reach of the RMB, with the goal of becoming a world reserve currency by 2015.
The London market is seen as a natural fit for China’s development of offshore RMB partners, as “the infrastructure is second to none and the crossover between Asia and the U.S. markets during the European time zone means London is wonderfully positioned,” states Derek Sammann, Senior Managing Director at CME Group.
The final details of the arrangement are still in the works, but confidence is high that a deal will be settled soon.
A five minute exclusive interview with Chris Devonshire-Ellis on this subject with Dukascopy TV of Switzerland can be listened to by clicking here.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email email@example.com, visit www.dezshira.com, or download the company brochure.
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