CNH Tracker-As London aspires to larger yuan role, Hong Kong only cements its lead

Reuters

By Saikat Chatterjee

HONG KONG, Oct 17 (Reuters) - London has stepped into a

bigger role as an offshore yuan hub this week but its challenge

to Hong Kong's entrenched position as a key player in the

internationalisation of the Chinese currency is not likely to

immediately dent the city's business.

Some say that widening the net of yuan investors to London

and Europe may benefit Hong Kong, a special administration

region of China. The city enjoys close ties with the mainland

and has already several years head start over rival regional

centres for offshore yuan business

China agreed this week to open up its markets for

British-based investors in return for allowing Chinese banks to

set up wholesale banking branches in London, easing regulations

imposed after the financial crisis and opening the doors for

more yuan trade to be settled in the city.

By doing so, London joins a bunch of cities this year -

Singapore and Taipei in Asia and Luxembourg and Paris in Europe

-- vying to snatch a share of the lucrative offshore yuan

business outside Hong Kong, rekindling fears that yuan business

is slowly moving away from the former British colony.

London, the world's largest foreign exchange centre, has

seen a surge in yuan-related business and these latest

developments are expected to accelerate that process.

Import and export financing totalled 33.6 billion pounds

($53.52 billion) in 2012, doubling from 2011 while foreign

exchange trading volumes in yuan nearly tripled in that period,

according to City of London data.

In nearby Luxembourg, about 24 billion yuan ($3.93 billion)

worth of bonds are listed on its stock exchange, putting the

country behind only Hong Kong and Singapore in terms of dim sum

bond issuance with names such as Caterpillar, Volkswagen

, Volvo and Alstom among others.

While that rapid growth, albeit from a very low base, has

made some market watchers nervous about Hong Kong's prospects,

Andrew Main, managing partner at Stratton Street Capital, a

London-based fixed income fund believes otherwise.

"The rise of London means Hong Kong is going to benefit in

the long term," said Main who manages $1.75 billion in funds of

which $375 million are in yuan-related assets. "This will open

tremendous interest in the Chinese currency as the pie only gets

bigger."

With London not appointing a clearing bank for yuan trade

settlement for now, it is likely that invoicing may be routed

through Hong Kong's clearing systems whose timings were recently

expanded to overlap with that of London.

While these new offshore centers look to Hong Kong for

guidance, a bigger challenge nearby could be China's own efforts

to prise open its markets via free trade zones. A new-launched

free trade zone in Shanghai seems a greater threat that has

prompted tycoons such as Hong Kong billionaire Li-Ka Shing to

say it may affect Hong Kong heavily.

But if the announcement around the Shanghai zone is any

indicator, that day of reckoning is still far away. Not only

were top government officials conspicuously absent at its

launch, only two banks, Citigroup and DBS,

grabbed this opportunity to set up a presence in the zone, an

indicator of the opacity on what exactly the advantages are.

Jonathan Fenby, director of China research at Trusted

Sources, a London-based independent research and advisory house,

said Beijing will not take risks on the reform front as they are

faced with heavy challenges in reshaping the economy and

breathing fresh life into the ruling party.

China is expected to unveil concrete plans to retool its

economy to rely more on consumption-driven growth and less on

investment at a Communist Party Central Committee plenum in

November.

"In time, things may of course change, but for the moment,

the Shanghai watchword seems to be: curb your enthusiasm," Fenby

said.

WEEK IN REVIEW:

* Hong Kong has no immediate plan to adopt the Chinese

currency as an alternative to its peg to the U.S. dollar even

though the city is the key hub for widening yuan usage in global

trade, Hong Kong's central bank chief said on Monday. If pegged

to the yuan, a stronger Hong Kong dollar would have a far more

corrosive effect on its exporters than the benefits to

importers.

* China's currency hit a record high below 6.10 per dollar

this week as state run banks stepped back their dollar purchases

from the currency market. Their absence coincides with data this

week that showed Chinese exports fell this month, confounding

broader market expectations of a rise.

* China's foreign exchange reserves - the world's largest

-grew by $160 billion in the third quarter, one of the largest

increases on record. UBS strategists believe that the rise is a

one-off event and reflects capital flows targeting more yuan

appreciation and positions behind the much expected U.S.

tapering being recalibrated.

CHART OF THE WEEK:Offshore yuan bonds in Hong Kong have weathered an emerging

market sell-off in recent months far better than its Asian

counterparts thanks to a rock solid currency. The Chinese yuan

remains the best performing Asian currency against the U.S.

dollar this year.

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