Britain needs to build closer ties with China's central bank to unleash London's potential market in offshore yuan trading, a former adviser to the People's Bank of China says.
While Chancellor of the Exchequer George Osborne, who cut Britain's growth outlook on Wednesday, was pushing for London to become an offshore centre for yuan trading, Britain was falling behind other countries in facilitating foreign-exchange flows through currency-swap agreements, Xia Bin said at a meeting of the London Advisory Council for China.
Seventeen countries had currency-swap agreements with China, and Britain was not one of them, Xia said. "[Britain] has huge potential for developing this business," Xia said. "This potential is not unleashed yet."
Cross-border trading of yuan has expanded fourfold since August 2010 to almost 200 billion yuan (HK$249 billion) in October, Euroclear Bank said in a statement, citing the Hong Kong Monetary Authority's figures.
UBS in London and HSBC's Hong Kong branch carried out their first repurchase agreement in yuan by using Euroclear and the HKMA to manage the collateral, Euroclear said. The repo allowed international financial institutions to use securities held with Euroclear as collateral to access liquidity from Hong Kong in yuan and other currencies, it said.
The Bank of England should push to expand the market further by discussing setting up a currency-swap agreement with China, Xia said. London was a step behind Hong Kong, which has closer communication with the mainland's central bank, he added.
The Bank of England's position was that if the swap agreement was necessary, "it will certainly consider it", Mark Boleat, policy chairman of the City of London Corp, which oversees Britain's main financial district, said at the meeting.
London had the capacity to boost issuance of yuan-denominated debt known as dim sum bonds, Katherine Tsang, chairwoman for Greater China at Standard Chartered, said at the meeting. Whether Britain could boost yuan liquidity depended on having a currency-swap line, Tsang said.
The yuan has strengthened 19 per cent in the past five years.
Meanwhile, the Canadian province of British Columbia plans to sell yuan-denominated bonds in what would be the first sale by a foreign government, expanding the use of the currency by sovereign states beyond China's borders.