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Yuan

Brexit could dull London’s sheen as offshore yuan centre

Hong Kong, Paris and Frankfurt expected to increase share in Chinese currency trading

PUBLISHED : Sunday, 19 June, 2016, 4:02pm
UPDATED : Sunday, 19 June, 2016, 4:01pm

London could lose its sheen as an offshore yuan centre if Britain decides to exit the European Union later this week, with a sizable chunk of the existing Chinese currency deals moving to other European cities and Hong Kong, analysts said.

It would also be a severe dent to London’s standing as a global financial centre considering that it is the world’s second largest offshore yuan centre after Hong Kong. London also has the largest pool of yuan deposits in Europe and has hosted several yuan bond floats, including last month’s 3 billion yuan (HK$3.6 billion) sovereign bond issue of the Ministry of Finance.

In addition, its gateway position in Europe makes it an ideal city for the offshore trading of the Chinese currency. Yuan bonds issued in London are easily tradable within Europe, said analysts. But if Britain decides to exit the EU, then these bonds would face European banking, fund transfer and talent recruitment restrictions.

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Brett McGonegal, chairman and chief executive of Capital Link International, a financial advisory firm, said the Brexit could have devastating effects on the UK economy and the pound.

“It (Brexit) will have a profound impact on London and its standing as a leading centre for overseas yuan transactions and products,” he said.

“Though the British currency has been extremely resilient despite the recent turmoil, it would still be difficult for London to retain its lustre. A simple economics 101 approach suggests that the Brexit would complicate matters,” McGonegal said.

Though China has not yet allowed its currency to float freely, it has since 2009 allowed international investors and companies to use the yuan for trade settlements or investment purposes. That move saw many global financial centres like Hong Kong, London, New York, Paris, Frankfurt, Tokyo and Sydney competing with each other for a slice of the massive yuan pie.

“If Britain were to exit the EU, London will find it hard to retain its gateway position in Europe,” said Benny Mau, chairman of Hong Kong Securities Association.

“Such a move would benefit Hong Kong the most as it is the world’s largest offshore yuan trading centre with the largest pool of yuan deposits outside of the mainland. If the issuers would not like to issue yuan bonds or yuan products in London, they would naturally shift to other centres and Hong Kong would be their natural choice.”

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Andrew Carmichael, capital markets partner at international law firm Linklaters, which advised the Ministry of Finance on its 3 billion yuan bond issue on the London Stock Exchange last month, said: “Being part of the EU and able to offer financial services to the rest of the EU means that Chinese banks based in London can operate all over the EU. This makes London an attractive centre to develop offshore renminbi activities,” Carmichael said.

If Britain decides to leave the EU, the fallout would depend on the deal structure, he said.

Such a move would benefit Hong Kong the most as it is the world’s largest offshore yuan trading centre with the largest pool of yuan deposits outside of the mainland
Benny Mau, chairman of Hong Kong Securities Association

“Depending on the deal, it could be more difficult for London based banks to market and sell inside the EU and there may be restrictions on EU investors’ ability to buy renminbi products issued in London,” he said.

Citing an example, he said that after the Brexit, the London Stock Exchange might cease to be a part of the European Regulated Market. This would make it difficult for investors who want to buy listed instruments that are part of the ERM.

“It will become more difficult for London-based banks to conduct renminbi activities in the EU. The EU may decide to relocate such services to cities like Paris, Frankfurt and Luxembourg,” he said.

Eleanor Wan, chief executive of BEA Union Investment Management, said the stock and currency markets have been gradually factoring in the Brexit risks, but are yet to gauge the implications for London.

“The question is whether London can retain its standing as an international financial centre and whether it will continue to be of significance to Europe. Although Frankfurt is another international financial centre in Europe, it still has a long way to go to fill London’s shoes,” she said.

Joseph Tong, chairman of Morton Securities, said London would retain its standing an international financial centre, despite the Brexit and cannot be replaced by Paris or Frankfurt.

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“London has a long history as an international financial centre. It has the rule of law, a sound banking system and an active stock markets. International investors will still like to trade in London even after Brexit. It is hard to find a replacement in Europe,” he said.

Tong said for London to act as an offshore yuan trading centre, it is not the Brexit, but Beijing’s policies for offshore yuan trading that matter.

“Beijing obviously has intervened in the offshore yuan market trading in Hong Kong, London and Singapore earlier this year to defend its currency from speculators. But now China is more concerned about yuan stability and has slowed its push for more offshore yuan trading centres,” Tong said.

The depreciation of yuan, which has declined 1.4 per cent against the US dollar this year after a fall of 5.6 per cent last year, has also cut investors’ interest in buying yuan products on fears of exchnage losses, he said.

“It is not just London. Hong Kong and other offshore yuan trading centres would also be affected by the yuan deprecation and Beijing’s policy measures,” he said.