London remains a leader in global FX and RMB transactions
RMB's global use is gradually growing with London still playing a major role as the biggest RMB clearing center outside of Asia
26 Sep 2019 | The Asset

Despite the ongoing Brexit uncertainty, London remains a leader in global FX especially for renminbi (RMB) trading, according to the SWIFT RMB Tracker report for Sibos 2019.

“As a major foreign exchange centre, London offers the RMB substantial room to grow organically, with minimal institutional and political intervention,” says David Scola, acting head of North America, Americas and UK regions, SWIFT.

The RMB is fifth in the share of global payments, having increased by 28 basis points from August 2017 to August 2019 to 2.22%. When excluding intra-eurozone payments, this share is lower at 1.42%. The number of financial institutions using the RMB for payments has risen by 11.31% in July 2019 compared to July 2017, taking the total to 2,214.

Out of these, 1,480 financial institutions involved China or Hong Kong in making international RMB payments, while the remaining 734 banks used RMB for payments without involving either of those two markets.

The largest increase of 20.98% was seen in Africa and the Middle East, where 173 institutions now use the RMB for payments as of this July. The growth is largely driven by China’s projects in Africa mainly under the Belt and Road Initiative (BRI). According to Caleb Fundanga, executive director of the Macro Economic and Financial Management Institute (MEFMI) of Eastern and Southern Africa, 14 African countries are planning on introducing the RMB as a reserve currency.

Meanwhile, Asia-Pacific saw a lower percentage gain of 12.15%, however it is ahead in terms of total institutions, with 112 new ones. Europe saw a modest growth of 8.02% while the Americans saw a larger increase of 13.07%.

However, while global usage of the RMB is increasing, its usage in the FX market is still low, representing less than 3% in July of activity share for several FX instruments combined.

London has a 6.18% share of global RMB transactions, making it the second-largest RMB-clearing centre in the world behind Hong Kong. This means it is the largest outside of Asia, and ahead of rivals like Singapore and South Korea.

However, London leads the FX business for the RMB, handling 33.79% of the world’s RMB offshore FX transactions. Hong Kong is in second place at 19.22%. In all FX instruments except for swaps, the UK dominates in terms of market activity. For example, in terms of options, it accounts for 53.80% of activity, while in non-deliverable forwards, the UK is responsible for 50.32% of activity. In forwards, the UK represents 40.73% of all activity while in the spot arena, it has 40.58% of activity.

According to SWIFT data, the RMB FX turnover in London has increased rapidly in the last four years. China sees London as a strategic location to introduce Chinese capital markets to foreign investors, having launched the London-Shanghai Stock Connect earlier this June.

This scheme enables Chinese firm to list A-Shares via Global Depository Receipts on the London Stock Exchange while London firms are able to list Chinese Depository Receipts in Shanghai. Huatai Securities is the first company to trade.

According to BOE data, FX turnover of offshore RMB in London has risen in recent years, both overall as well as across the trade volumes of different financial instruments. The average daily turnover increased in 30.06% from 60 billion pounds (US$74.05 billion) in Q1 of 2018 to 78 billion pounds in Q1 of 2019.

This can be attributed to China’s decision in September 2011 to designate London as an offshore trading centre for the RMB. In 2014, the UK became the first Western government to issue RMB-denominated bonds.

London’s place at the top of the chart for the use of RMB in FX business mirrors the city’s status as the world’s biggest foreign exchange centre, representing over half of the total FX market globally. This is driven by several factors such as the high level of liquidity that enables the market to absorb the impact of large deals, sizeable trading volumes that benefit the biggest players, as well as a favourable geographic location and access to reliable infrastructure.

The slowing global economy and increasing Brexit worries have impacted forecasts such as the BOE’s growth forecast, which it has cut. Brexit developments are expected to push the British pound further down against the euro, which will likely push up derivatives demand.

While many financial services firms are waiting to see how the relationship between the UK and the EU develops following Brexit, the UK is likely to remain a key player in both FX and payments.

RMB internationalization is increasing in other places, such as Japan. In October 2018, Japan signed a three-year currency swap agreement with China worth US$30 billion. On June 27, 2019, MUFG became the first Japanese bank to be designated by the People’s Bank of China as an RMB-clearing bank, bringing the overall number of such banks to 24.

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