Bank of England Governor Mervyn King and his Chinese counterpart Zhou Xiaochuan (周小川) agreed to a three-year currency swap line to promote financial stability and trade between China and Britain.
The maximum value of the arrangement is 200 billion yuan (US$33 billion), according to a statement published by the UK central bank on its Web site on Saturday. The People’s Bank of China put the sterling value at ￡20 billion (US$31 billion) in a statement posted on its Web site.
“The establishment of a sterling-renminbi [yuan] swap line will support UK domestic financial stability,” King said in the news release. “In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the bank will have the capability to facilitate renminbi liquidity to eligible institutions in the UK.”
The agreement puts the Bank of England first in a race among European central banks to establish swap facilities with China, allowing London to expand ties with the world’s second-biggest economy.
The UK capital is the center of the world’s US$4 trillion-a-day market for foreign-exchange trading.
China has allowed businesses to settle foreign trade in yuan and signed swap agreements to promote the use of the currency in international trade and investment. It has also eased rules for foreign companies to invest in the country using yuan raised offshore, as well as starting direct trading with currencies including the yen as part of efforts to make the yuan a global currency.
The yuan has appreciated 1.6 percent this year against the US dollar, making it Asia’s best performer among 11 regional currencies tracked by Bloomberg. The currency touched a 19-year high of 6.1210 on May 27 and fell 0.1 percent to 6.1342 on Friday, according to China Foreign Exchange Trade System prices.
“The move can help enhance London’s prospect of becoming a renminbi offshore center,” Frances Cheung (張淑嫻), a strategist at Credit Agricole CIB in Hong Kong, said by telephone yesterday.
“It is very important to have London as an offshore center because it covers clients in different time zones, where Hong Kong or Singapore may fail to reach out. It will also help China step closer to globalizing the yuan,” Cheung said.
Since cross-border trading of the yuan started in 2010, the proportion of China’s trade settled in the currency has surged sixfold to 12 percent, according to DBS Group Holdings Ltd. The yuan’s share of international payments rose to 0.74 percent in March from 0.25 percent in January 2011, Nathan Chow (周洪禮), a DBS economist in Hong Kong, wrote in an opinion article in Singapore’s Sunday Times newspaper.
Taipei became the second hub for offshore yuan note sales in February, following the start of the Dim Sum bond market in Hong Kong in 2007. Industrial & Commercial Bank of China Ltd’s (中國工商銀行) Singapore branch began clearing services for the currency last month.
China already has currency-swap agreements with countries including Australia, South Korea and Malaysia.
The latest pact is one of the final legacies of King, who will leave the central bank at the end of this month. It is also the culmination of a flurry of economic diplomacy with China at a time when rival European centers are also jostling for a role in trading yuan. King had met Zhou in February and agreed to “facilitate” discussions.
Bank of France Governor Christian Noyer said in an interview last month that he is seeking agreement among euro-area central banks for ways of providing liquidity support in Chinese yuan.
Paris is competing with London and Zurich to become the center for yuan trading in Europe as China makes its currency more widely used around the world.