London eyeing a slice of the financial pie(2)

According to data released by the City of London, by the end of 2012, London achieved robust growth in trade-related yuan businesses. The volume of import and export financing increased by 100 percent, compared with the end of 2011, to 33.6 billion yuan.

London also saw a few yuan bond issues in 2012, including ones by HSBC and China Construction Bank.

China Construction Bank, the country's second-largest lender, launched a 1 billion-yuan London-listed bond, or a so-called dim-sum bond, in November 2012, the first Chinese borrower to issue bonds in the London yuan bond market.

"China Construction Bank's decision to float the bond in London is proof of London's growing stature as the Western hub for renminbi business," Osborne says.

Another example of a product that helped boost London's yuan liquidity is the repo transaction between UBS AG in London and HSBC Holdings Plc's Hong Kong branch, carried out in December 2012, with the Hong Kong Monetary Authority managing the collateral.

The deal allows HSBC to lend its yuan in Hong Kong to UBS in London, where the liquidity for yuan is smaller, so effectively helping London to deal with the risk of fragmented liquidity in London, says Candy Ho, HSBC's head of yuan business development in Hong Kong.

"Hong Kong has the most liquidity for renminbi, but there have also been a lot of renminbi transactions coming through different parts of the world," she says.

"By reducing the risk of fragmented liquidity and allowing funds to flow between different renminbi centers, overall offshore liquidity for renminbi will increase."

As London is not currently an offshore center for yuan, offshore yuan accumulated in London can only flow into the Chinese mainland via Hong Kong's clearing bank, Bank of China's Hong Kong branch. This allows European banks with yuan accounts to participate in the yuan Real Time Gross Settlement system in Hong Kong.

But Boleat says he does not see an urgent need for London to have a clearing bank because the Hong Kong arrangements serve London's needs.

Boleat adds that maintaining a single pool of offshore yuan is important for the development of a liquid, global offshore market. "We hope that developments in other centers will not see segregated pools of renminbi being developed."

Fang of BOC says: "In the beginning, it's better to take advantage of Hong Kong's system. But we should never underestimate London's potential in conducting renminbi business. We all believe that there's great potential for London to be an offshore center."

Zhu Yinan, a senior associate at the international law firm Clifford Chance, adds that the People's Bank of China, Bank of England and other market participants are constantly monitoring the progress and evaluating the need for having a separate settlement and clearing system for London.

"As we are all aware, PBOC has been developing a new payment system, the China International Payment System, which is being designed specifically to cover renminbi settlement from different time zones and this could be introduced as early as the beginning of 2014," Zhu says.

Zhu says how the system will interact with existing payment channels and clearing banks is yet to be seen, although the reference to "eligible participants" in it by PBOC implies it will not replace the existing payment systems straightaway.

Zhu says that if London has its own clearing bank, it will make local transactions more efficient and also help to develop the capital market activities in the city.

"It would make more sense to have the swap line if there is a local clearing system in London," Zhu says. "Earlier this year, the chief representative of PBOC in Europe indicated that it would be supportive of London having its own clearing bank if that's what London needs."

"International and Chinese banks have been eyeing opportunities and movements across the continent in this regard, and working behind the scenes to win the support of Beijing in circumstances where a yuan clearing bank in London may be appointed."