China, UK to Start Direct Currency Trades -- Update

By Tommy Stubbington 

A package of measures announced on Wednesday by China’s central bank handed the U.K. a boost in its bid to be a leading center for renminbi trading.

The moves–which came as Chinese Premier Li Keqiang tours the U.K. this week–underline the key role of London as China moves to boost the use of the yuan as an international currency.

The People’s Bank of China said it is allowing direct foreign-exchange market deals between the yuan and the British pound in a bid to increase bilateral trade. Previously, traders have had to exchange the currencies through the U.S. dollar.

The central bank also said it has chosen China Construction Bank Corp. as the first yuan-clearing bank in London.

Several financial centers are vying to be the global hub for China’s currency, including Luxembourg, Sydney and Singapore. London, the world’s biggest hub for foreign-currency transactions, has made a strong push to corner a significant chunk of renminbi business, which is expected to grow strongly along with China’s economy.

The Bank of England said the appointment of a London renminbi clearing bank was an “important milestone” in the progress toward greater cross-border use of the currency.

“China Construction Bank will play a valuable role in facilitating greater use of the renminbi for trade, investment and other economic activities in the U.K., particularly by providing a further option for U.K. firms to clear and settle their renminbi activity within the London market,” BOE governor Mark Carney said in a statement.

“Rome was not built in a day and the City was not built in one day too, but the cross-border use of renminbi will now move from initial stage to take off,” Mr. Keqiang said on Wednesday.

London-based clearing will enable U.K. businesses to make and receive renminbi payments later in the day, beyond the current 3 p.m. cutoff as Asian clearers close for the day. With immediate effect, China Construction Bank–the country’s second-largest lender by assets–can process transactions in the Chinese currency, the People’s Bank of China said in a statement.

“Without an official clearing bank, clearing activities can still be completed by internal cooperation between individual banks or by use of other clearing systems such as the Hong Kong one, but such channels would require more work, timing differences and remoteness from the banks that provide this service,” said Andrew Carmichael, a capital markets partner at U.K. law firm Linklaters.

“The granting of branch licenses to Chinese banks in London should lead to further boosts to London’s yuan activities, which would again support London’s position as a global financial center,” he said.

Meanwhile, direct sterling-yuan trade should encourage trading between the two currencies.

“The key is that it reduces transaction costs for clients,” said Dave Pavitt, head of emerging-market foreign-exchange trading at HSBC. “[Currently] you essentially pay two sets of transaction costs in the spread. Now that it will be possible to trade them directly, you cut down that expense.”

HSBC has been given approval by the PBOC to be one of the first market makers for direct trading of the renminbi and pound.

“Having the direct quote for sterling/renminbi trading improves transparency for the end user and helps lay the foundation for the use of the renminbi as a new global currency,” said Beng-Hong Lee, head of markets, China for Deutsche Bank.

The yuan is already traded directly against the U.S. dollar, the Australian and New Zealand dollars, the Japanese yen, the Russian ruble and the Malaysian ringgit.

Grace Zhu, Chiara Albanese and

Katie Martin

contributed to this article.

Write to Tommy Stubbington at tommy.stubbington@wsj.com

(END) Dow Jones Newswires

June 18, 2014 07:09 ET (11:09 GMT)

Copyright (c) 2014 Dow Jones Company, Inc.

China, UK to Start Direct Currency Trades -- Update