The Bank of England and the People’s Bank of China reached an agreement on Wednesday to allow the clearing and settlement of renminbi trades in London, the first such arrangement to be struck outside of Asia and another sign of the British government’s determination to make London a leading Western hub for Chinese trading.
The central banks will sign a memorandum of understanding at the end of the month and a bank will be designated soon, according to the British Treasury.
“Connecting Britain to the fastest-growing parts of the world is central to our economic plan,” said George Osborne, the chancellor of the Exchequer. “It’s why I’ve put such government effort over the last three years into making sure we’re the leading Western center for trading in the Chinese currency.”
Mark Boleat, policy chairman for the City of London Corporation, said he expected the agreement to affect how businesses in Britain operated. “It should encourage more U.K. firms to use the renminbi as a currency for international trade,” he said.
British officials announced their intent in October to seek approval for a clearing and settlement bank. The British prime minister, David Cameron, and China’s president, Xi Jinping, discussed cooperation of the two banks in a bilateral meeting on the sidelines of a nuclear security gathering in the Netherlands this week, leading to the announcement of the arrangement on Wednesday.
Analysts say the government sees the potential for growth. “Its vision is to become the No. 1 center for anything that Chinese currency can be used for outside of Asia, including deposits, foreign exchange transactions, debt and loans and dim sum bonds,” said Jinny Yan, an economist at Standard Chartered Bank.
Ms. Yan said that Standard Chartered Bank developed a renminbi globalization index to measure overall growth in offshore renminbi use. It includes deposits, trade settlements and other international payments, dim sum bonds — Chinese bonds that attract foreign investors — certificates of deposit issued as well as foreign exchange turnover, all from an offshore perspective and denominated in renminbi.
Mr. Cameron has made clear that he wants to be at the center of the rise of the renminbi. During the October talks, Mr. Cameron told a Chinese business gathering, “If you are investing in Britain, invest more.” He later added, “No country in the world is more open to Chinese investment than the U.K.”
According to Swift, the banking payments provider, 62 percent of renminbi payments outside of China take place in London. London is also the largest hub for foreign exchange trading, with about a 41 percent market share. But there are areas where London lags, like deposit-taking, said Ms. Yan of Standard Chartered. Luxembourg and Frankfurt are ahead on that front.
The London Stock Exchange has also been eagerly courting Chinese business and seeking to expand its access to Chinese products. In January, two China-focused exchange-traded funds listed in London.