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
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
"In time, things may of course change, but for the moment,
the Shanghai watchword seems to be: curb your enthusiasm," Fenby
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
* 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.
CNH Tracker-Stable market, growing trade boost international use
of yuanChina c.bank underlines reform push with record yuan despite
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