Why Britain should hold onto its leading position in RMB trading

Note: The following is an edited translation of a commentary from the Chinese-language "Commentaries on International Affairs."

Against a backdrop of increasing downward pressure on the Chinese economy and ongoing uncertainties in Sino-US trade talks, there has been unremitting badmouthing of China's currency, the renminbi (RMB), on the international capital markets apart from in the traditional financial powerhouse, Britain. According to a Bank of England survey, the volume of RMB trading in London last year exceeded pound-against-euro trading, which has helped strengthen London's position as the world's largest foreign exchange trading center, in spite of the country being deeply bogged down in the Brexit mire. If London can keep its tight grip as a leader in RMB offshore trading, the negative effect caused by Brexit could be largely offset.

Britain has retained its position as the biggest hub for offshore trading of China's Renminbi currency, with transacted volumes reaching a record high in 2018. [File photo: VCG]

London, the world's largest foreign exchange center, was a comparative late comer and first bid to become a leading center for offshore RMB trading in 2012, following in the footsteps of Singapore, Paris, Frankfurt and Luxemburg.

But it quickly overtook Singapore, the world's first offshore RMB trading center, and Frankfurt, the first offshore RMB trading center in Europe, to become the biggest hub for offshore trading of the Chinese currency. This was helped by a big increase in the number of UK-China cross-border economic and trade transactions being settled directly in RMB. In the first eight months of last year, the actual payment of China-UK cross-border transactions in RMB totaled 250 billion yuan (around $37 billion), 2.5 times the volume reached a year before. Over one fifth of bilateral trade of goods was settled in RMB.

The Shanghai-London Stock Connect mechanism, a cross-listing program between exchanges in Shanghai and London, widely expected to be launched in the first quarter of this year, promises to give London a head-start over rival financial centers in New York and Europe. [File photo: VCG]

Britain's decision to expand RMB usage comes as no surprise. On the one hand, RMB-denominated bonds held by overseas investors stood at 1.5 trillion yuan by the end of last year, two fifths of which was new investment made in 2018. On the other hand, since the Chinese currency was officially included into the International Monetary Fund (IMF) Special Drawing Rights currency basket in October 2016, an increasing number of countries and multinational enterprises have adopted RMB for payment and settlement. Over 60 countries and regions have included RMB in their foreign exchange reserves and dozens of countries have signed currency swap agreements with China. Additionally, China and Britain are pushing for bilateral tools such as the Shanghai-London Stock Connect mechanism, a cross-listing program between the exchanges in Shanghai and London, to facilitate direct financing on each other's capital market. The steady internationalization of the Chinese currency has made it perfectly natural for Britain to increase the level of RMB settlement.

Deputy Governor of the People's Bank of China, Hu Xiaolian (foreground center left), and Deputy Governor of the Bank of England John Cunliffe (center right), prepare to exchange signed MOU on renminbi clearing and settlement in London on Monday, March 31, 2014. This decision further strengthens London's position as the Western center of renminbi trading. [File photo: AP/Olivia Harris, Pool]

London's position as the leading global financial center is under enormous threat due to the uncertainties that may be triggered by Brexit. But as long as it maintains its dominance in offshore RMB trading, such concerns could be greatly reduced as the stability of the value of the RMB is constantly improving and the prospects of RMB internationalization are becoming more promising, backed by China's huge forex reserves and increasing comprehensive national strength.