The United Kingdom's, and England's, capital has the fifth largest urban economy in the world after Tokyo, New York, Los Angeles and Chicago with an estimated GDP of nearly $565 billion based on 2008 figures - that's larger than some national mid-sized economies such as Belgium, Sweden and Switzerland. London maintained its top ranking as the number one financial center on the latest Global Financial Centers Index (GFCI) in March 2013. The city has held that position since the twice-a-year GFCI was launched in 2007. The Index ranks 79 of the world's top financial centers based on competitiveness via responses to surveys and ratings primarily answered by investment professionals worldwide. New York came in second, followed by Hong Kong and Singapore, and the report anticipated these four strong centers to remain powerful players for the foreseeable future.
London was the best performing financial center even when assessing sub-sectors of the financial industry. The city topped three of the five sub-sectors examined by the survey in Investment Management, Government and Regulatory, and Professional Services. It also ranked second in Banking and third in Insurance. In another important assessment, the GFCI looked at how the leading centers were viewed by different sizes of organizations. London and Singapore were rated higher by companies with less than 100 employees compared to New York or Hong Kong. London, alongside New York, was also rated higher than other top financial centers by firms with over 5,000 employees - a testament to the scope and depth of the city's financial sector. Building on all these strengths and accolades, London is now taking significant steps towards becoming Europe's first offshore RMB center.
A Wider Role for an Underutilized RMB.
China has undoubtedly carved itself a place among the world's economic powerhouses after decades of mind-boggling growth, even in times of global economic turmoil. The country took over Japan in 2010 as the world's second largest economy; officially its current GDP is $8.25 trillion. Some estimates say China will overtake the United States as the world's biggest economy by 2020, a recent report by the Organization for Economic Cooperation and Development (OECD) projected that happening as early as 2016. Asia's not-so-sleeping giant also stripped the US from its spot as the world's largest trading hub recently. Its currency, however, has not yet caught up with that level of economic prowess and remains well behind that of other economically smaller countries.
Import-export activity is usually a catalyst for increased usage of a currency on the international level due to large volumes needed to settle trade transactions. According to a 2011 white paper by SWIFT, the main provider of secure financial messaging services, the RMB was world payment currency number 21, with a tiny share of 0.24 percent of global payments value, while China's share of global trade in 2010 was much more substantial at 11.4 percent. These uneven figures show exactly how internationally underutilized the RMB is compared to its economy. In contrast, internationalized currencies such as the USD, EUR and GBP are used on a global scale well beyond the specific nation or bloc's share of world trade. In June 2011, 98 percent of payments to and from China were not made in RMB; in fact most of them were made in USD. Although the Chinese currency's use has increased since then, current estimates suggest that near 10 percent of trade settlements with China are now conducted in RMB mainly through HK, it still has a long way to go before it reaches usage levels seen in the US or Japan - where 90 and 70 percent respectively of payments in and out of the country are made in local currency. These of course are developed economies whose currencies have been freely traded on exchange markets around the world for years. Nonetheless, the RMB utilization rate is still low even when compared with the RUB for example, which accounts for 46 percent of payments conducted with Russia.
The Chinese government has taken on several positive initiatives to increase the international use of the RMB including allowing qualified foreign institutional investors to invest in local stock markets, signing currency swap agreements with a number of countries, an ongoing liberalization of currency controls, and recently permitting a number of investment options denominated in RMB. It has also been strongly supported by foreign central banks and the private financial sector that has identified the big potential gains associated with the RMB going global. Today, as reported by SWIFT, more than 1,050 financial institutions in over 90 countries are already engaged in RMB related business. With 'Dim Sum' bonds and RMB IPOs in HK likely to continue growing, RMB retail services in Singapore and other countries truly picking up and the current FX trading activity around the RMB in London set to expand, all signs point towards a much greater role for the RMB on the international level in the coming years.
Why London.
Though not already a done deal, London has several key advantages that have earned it its pole position to become China's new RMB trading center. For one, it is the biggest center for international-bond issuance and currency trading. Additionally, the capital city is well equipped with financial professionals and efficient trading systems. Its market share of worldwide financial activity is particularly high with respect to cross-border bank lending (18 percent), OTC interest rate derivatives (46 percent) and foreign exchange dealings (40 percent, with a daily turnover around a staggering $2 trillion). With China aiming to take its currency to the next level on a global scale, London's time zone could be an essential piece of the puzzle. In a global economy that never sleeps, working hours that overlap with those of China and the rest of the world from Australia to Brazil offer London a valuable asset compared to, say, New York which is almost at the exact opposite side of the planet from China. It would also support HK's time zone and extend RMB trading hours for traders based in the Middle East, Europe and Africa as well as the Americas.
Being an integral part of the global financial system for such a long time, London has acquired the ability to continuously evolve in terms of innovation and regulations while being highly responsive to market changes. Its institutions are some of the biggest players in the financial scene and can make use of the massive liquidity at their disposal. The city already offers a wide range of RMB banking services both corporate and individual, including forex trading, corporate accounts and trade financing using the existing infrastructure in HK for clearing. According to a report by the City of London, London's 2011 deposits of the Chinese currency totaled ¥109 billion, split between ¥35 billion from customers and ¥74 billion in institutional and intra-bank deposits. Spot RMB forex trading in London was valued at $0.68 billion per day, and estimated to account for 26 percent of the global offshore RMB spot market during 2011.
With the growing importance being placed on RMB business and CNH (China's offshore Yuan), London is not the only European financial center vying for China's backing to become its next offshore trading center. Several others, including Paris and Zurich, are also in the race for the same status. In an interview with Invest In, Mark Boleat Policy Chairman for the City of London Corporation (the city's highly influential local authority) was confident of London's competitive edge while pointing out that competition was not necessarily a bad thing. "Competition will always be a feature of financial services - driving down costs and promoting efficiency. But financial services are not a zero sum game - the growth of other centers increases liquidity across the whole market, and the CNH market is no different. London offers the widest range of RMB products and services in its time zone, and is the international financial center for this region. This is a natural advantage", he said.
Boleat also highlighted the city's major strengths in RMB services in retail, corporate and institutional business as well as foreign exchange with "more dollars traded here (London) than in the US". On the latest status of the Chinese currency's offshore business he said the market "grew significantly in the first six months of 2012 with transaction volumes in foreign exchange and trade services growing strongly. This is a very positive signal. We are also working closely with the People's Bank of China on developing London's capabilities."
Opportunities and Obstacles.
The development of RMB denominated products and services has already made an impact on what customers expect of their financial service providers as well as what defines viable long term corporate strategies. Be it in investment, commerce, FX trading or any other sector, many businesses simply cannot afford to have a neutral RMB strategy in today's increasingly interconnected business environment. Hong Kong is of course the major hub for CNH trading, but London is steadily gaining an increasing share of this promising offshore market. Experts anticipate larger volumes of RMB business in the city as more corporate and institutional customers seek out such products and services. The City of London Corp initiative is focused on providing support to the city's financial center in order to create and maintain a long-term CNH market, where companies and investors are able to invest, settle trade transactions, and bill their customers and bank all in RMB. Both Chinese and Non-Chinese financial institution are already feeling the effects from these early stages of the Chinese currency's internationalization and are closely monitoring its progress. China's major banks want to capitalize on this opportunity to follow their own clients who are expanding to overseas markets. International banks, on the other hand, are keen to assist the large number of foreign corporations who are currently looking for ways to buy, pay and invest in RMB received from dealing with Chinese businesses.
"We are hoping that London will develop a strong market in a range of RMB products and services", said Boleat, before highlighting three key benefits such a market would offer to businesses working in or with China. First, it would help "facilitate trade with China for European corperates including SMEs, increasing exports and therefore boosting growth and benefitting European employment." Second, it would make it "easier for European corperates to use renminbi for trade settlement purposes. For example, RMB accounts can simplify trade settlement, conducting capital injections into onshore operations and repatriating RMB proceeds out of a company's China operations." Lastly, he added, "using RMB acts as a natural hedge for corporates which have a two-way trade ?ow with China - reducing foreign exchange costs and risks."
Despite the massive potential accompanying a truly international RMB, China does face certain risks and obstacles as it reaches for that goal. Financial experts and different foreign government officials often mention currency controls as one of the major roadblocks to the globalization of the RMB. General transparency issues are another, especially following several reputable financial institutions questioning the country's recent reports on its economic indicators. A fully convertible RMB in the future will not be without risks; a currency whose value is determined by the forex exchange market is always vulnerable to that market's ups and downs. Shocks to the global financial system would have a much larger effect on the Chinese currency if it were freely traded on the open market. While officials in China have not announced a specific timeframe for the RMB to reach full convertibility, some analysts don't expect that to happen until 2020, others forecast it within the next five years.
