Brexit puts London's offshore yuan lead under threat

A banner is held up during a demonstration against Britain's decision to leave the European Union, in central London, Britain, on July 2.
A banner is held up during a demonstration against Britain's decision to leave the European Union, in central London, Britain, on July 2.PHOTO: REUTERS

SHANGHAI/SINGAPORE (REUTERS) - Brexit has cast a shadow over London's coveted status as the top offshore yuan hub in Europe, although bankers say the city still has strong cards to play against its continental rivals.

London overtook Singapore as the second-largest offshore yuan clearing centre in terms of payments processing volumes, just behind Hong Kong, said global transaction services organisation SWIFT in April.

Hong Kong still processes 72.5 per cent of all yuan payments, against 6.3 per cent in London and 4.6 per cent in Singapore.

The UK's June 23 referendum came less than a month after China's Ministry of Finance printed debut Dim Sum bonds of 3 billion yuan (S$607.4 million) in London, the latest in a series of initiatives going back five years to promote the internationalisation of the yuan in London.

The close financial cooperation between the UK and China, one of the highlights of President Xi Jinping's state visit last October, may stall in the near term as Britain looks at ways to handle its exit from the EU.

Brexit "is a slap in the MoF's face", said a DCM banker. "It will probably have second thoughts about a second or third Dim Sum sale in London."

When the People's Bank of China launched its first bond sale outside the PRC in London last year during Xi's visit, there were expectations that China would issue more Dim Sum bonds of various tenors in the city to build a complete yield curve for the offshore yuan in Europe.

Following Brexit, China is now likely to review its yuan strategy for Europe.

"China used to prioritise the yuan centre in London over other centres on the continent, but after Brexit it will give at least equal attention to London and other centres, such as Luxembourg and Frankfurt," said Lian Ping, chief economist with Bank of Communications.

Even China's official news agency, Xinhua, noted that Brexit could affect the internationalisation of the yuan, in view of the role London has played in the process to date.

"Brexit will challenge London's position as a premier global financial centre, which may encumber the pace of the yuan's internationalisation," Xinhua said on the day after the vote.

BoCom's Lian said other major European cities would seize the opportunity to strengthen their own standings and China needed to take the shift into account.

According to lawyers, barriers may be put in the way of selling London-based yuan products to European investors.

"As a result of the vote, it will, subject to whatever deal the UK negotiates, likely 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 London-originated yuan products," said Andrew Carmichael, capital markets partner at Linklaters.

"For example, some institutional investors only want to invest in products that are traded on a stock exchange in Europe. Currently, these investors are able to invest in yuan products, such as bonds, listed on the London Stock Exchange, but this may be more difficult under the new rules."

However, most market participants do not foresee the immediate decline of London as the leading offshore yuan hub, given its unparalleled advantages in foreign-exchange trading and its favourable time zone and language.

"The key reason that London has become the biggest CNH market outside Asia, first of all, is the advantage of being the biggest centre for forex trading," said Jinny Yan, London-based chief China economist at ICBC Standard Bank. "Overall advantages in time zone and language have allowed London to thrive as an offshore RMB hub. In my view, none of these factors will change as a result of the referendum."

She pointed out that it would be very difficult for other European cities to replicate London's success as an international financial centre in the immediate future.

Luxemburg, Frankfurt and Paris all have different competitive advantages, according to Ms Yan. Paris and Frankfurt have a natural edge for trade settlement given the large trade volumes of France and Germany with China, while the UCITS fund community domiciled in Luxemburg is crucial for cross-border yuan activities in the euro area.

However, London's dominance in the forex market means it is still the top settlement centre for all cross-border yuan activities outside Asia.

Britain also has an edge for commodities trading and is still holding discussions with China to set up a stock-trading link between London and Shanghai.

Ms Yan noted that Brexit gave the UK an added incentive to defend its position as the leading offshore yuan centre outside of Asia, as global use of the currency is set to grow.

"Confronted with restrictions from the EU, the UK is more likely to step up efforts to develop the offshore yuan market as it seeks closer ties with big developing countries, including China and India," BoCom's Lian Ping said.