Yuan to trade directly with UK pound
Today's change replaces system of referencing the two currencies' rates against US dollar
While Premier Li Keqiang tours Britain, the yuan took another major step on its global journey yesterday as Beijing said the currency will start trading directly with the British pound from today.
The central parity rate of yuan against pound - or the midpoint exchange rate around which the daily rate will hover - will be calculated based on the direct quotations from the appointed market markers. Previously, traders would have to reference the two currencies' exchange rates against the US dollar if they wanted to convert yuan to pound or vice versa.
The transaction volume of London's yuan exchange market, which includes trading of spots, forwards, swaps and options, is expected to take off following the move.
[This] unlocks a great deal of potential for the investment community
Market watchers expect overall investor interest in yuan to pick up and help create a huge "Euroyuan" market the way the US dollar was boosted in its early years as a global currency.
Euroyuan refers to yuan deposits at foreign banks or foreign branches of Chinese banks. London is the largest depository for the Eurodollar, or US dollars outside the United States.
"Given London's dominant position in the global forex market and the UK's sizeable banking sector, the potential for financial products would be enormous," said ANZ economist Liu Ligang. "Direct conversion and the clearing facility will lay the foundation for London to nurture a Euroyuan market."
London currently has only around 15 billion yuan (HK$18.86 billion) of deposits, lagging far behind its major competitors such as Hong Kong and Singapore, or even Luxembourg.
Robert Minikin, senior foreign exchange strategist at Standard Chartered, said he expects the yuan option market, in particular, to grow rapidly.