London set for a role in yuan transactions

London is set to become a major offshore trading center for the yuan, as Britain teams up with Hong Kong to develop such business.

The Hong Kong Monetary Authority (HKMA) and the UK Treasury on Monday agreed to launch a private-sector forum to strengthen links between Hong Kong and London in such areas as clearing and settlement, market liquidity and the development of new yuan-denominated products, the HKMA said in a news release.

The forum will have representatives from financial institutions in Hong Kong and London, including HSBC Holdings PLC, Standard Chartered PLC, Bank of China Ltd, Deutsche Bank AG and Barclays PLC. It will meet twice a year, and the first meeting will be held in Hong Kong in May, it said.

China and Britain agreed in September to cooperate on the development of the offshore yuan business and develop London into an offshore yuan market.

UK Chancellor of the Exchequer George Osborne said in Hong Kong on Monday that the intention was to "establish London as a new hub" for the yuan.

"It's clear that there is scope for a substantial expansion of the yuan market in the coming years," he told a meeting of Asian finance officials and executives.

He added that London was perfectly placed to be a gateway for Asian investment and banking to Europe and as a bridge to the United States.

Osborne said establishing London as an offshore center for yuan-denominated settlements will benefit China's economic development as well as Britain's.

China's rapid growth had provided opportunities that Europe should seize as it struggled to emerge from the sovereign debt crisis. Britain's merchandise exports to China rose 20 percent in 2010, a measure of the importance of Asia to Britain's long-term economic growth, said Osborne, who is visiting Hong Kong, Beijing and Tokyo to strengthen business ties, especially in financial services, infrastructure and innovation.

The HKMA plans to extend the operating hours of the yuan real-time settlement system to 15 hours by the end of June, to accommodate London and other European markets to settle offshore yuan payments.

"The fact that China will open its third yuan offshore market in London is a strategic decision for the world's second-largest economy to increase the convertibility of the yuan and evolve the yuan into a reserve currency globally," said David Wang, executive director of the Royal Bank of Scotland (China) Co Ltd. He said a deeper economic partnership and a stronger willingness to cooperate underpin the establishment of such an offshore market.

China and Britain aim to increase annual bilateral trade to US$100 billion from the current level of US$50 billion to US$60 billion.

"The move is necessary, given China's growing investment in the UK and the wider eurozone, as well as its increasing trade with the region," said Daniel Chan, chief economist at BWC Capital Markets.

Kevin Lai, an analyst at Daiwa Securities Capital Markets Co Ltd, said that internationalization of the yuan will require more than one offshore yuan business center.

"However, the lack of a natural funding pool could undermine efforts to establish London as a new hub for the offshore yuan business," he said.

Hong Kong's yuan liquidity pool, which grew significantly over the past two years, meant that it was well-placed to help with the development of the offshore yuan market in London, Chan said.

The new cooperative agreement "means that London recognizes Hong Kong as the major yuan trade settlement center", said Andrew Fung, executive director of Hang Seng Bank.

Nicholas Kwan, head of research at the Standard Chartered Bank (Hong Kong) Ltd, warned that competition between the two financial centers would likely increase.

"As time passes, the development of offshore yuan businesses may (lead to) market competition that both parties may not have anticipated. We must monitor market developments closely."