The City’s financial innovators may soon get the chance to run wild with China’s partially convertible currency. But London could give yuan trading too big a bang. Even if trading in the UK helps the redback become a more credible alternative to the US dollar, Beijing may prove reluctant to give it the freedom it needs to fly.
China wants a global currency to reflect its growing heft. More trade in yuan would also cut some of China’s import transaction costs, and reduce its exposure to the whims of Washington. With most of its $3.2 trillion in foreign reserves in dollars, Beijing suffers whenever the dollar falls, while Washington gripes when the yuan fails to climb.
London would be a logical sequel to what China has achieved in Hong Kong. Yuan deposits in the territory have climbed to at least $97 billion, roughly 10 per cent of all deposits, with most of that arriving since 2010. Companies sold roughly $14.7 billion worth of yuan-denominated bonds in the first 10 months of 2011. Demand for yuan-denominated derivatives has also boomed.
As the world’s biggest foreign exchange market, London could vault the renminbi into the big league. The City’s commodity traders could also help China insinuate its currency into those giant markets. There is a precedent in Islamic finance: thanks in part to its gravitas, London’s share of that market went from virtually nothing in 2006 to supporting a $3.5-billion bond sale, then the world’s largest, by Dubai’s Nakheel by 2007.
London’s enthusiasm for the yuan may, though, give Beijing pause. While China wants a global currency, it doesn’t want to be subject to the will of the markets. For the United States, having the world’s most popular currency has meant being unable to control what banks do with it beyond one’s borders, and losing some control of monetary policy. Fear of that may prove more powerful than a desire to escape from the dollar diktat.