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The Canary Wharf business and financial district in London. [Photo/Bloomberg]
George Osborne, British chancellor of the exchequer, announced an initiative on Wednesday that reaffirms his support of London becoming an offshore yuan center.
That came as the banking and financial services company HSBC Holdings Plc introduced the first yuan-denominated bond to be offered in London.
Meanwhile, the City of London Corp, which governs an area in central London, published a report showing that 109 billion yuan ($17.3 billion) worth of customer and interbank yuan deposits were held in the city at the end of December.
"This is a significant moment," Osborne said as he introduced a policy named "London as a center for offshore renminbi business".
"This builds on the progress London has already made toward becoming the Western hub for renminbi.
"Today's event emphasizes that we are not prepared to let anyone steal a march on us in terms of new products and new markets. We are the natural home in the West for those who want to invest in China's economic success story."
Osborne's comments came after HSBC announced the introduction of a 3-year yuan bond.
HSBC's term sheet for the bond issuance implied it was worth at least 500 million yuan, Reuters has reported.
The proposed issuance comes amid reforms Beijing has made to advance its plans to make the yuan an international currency. London is working to make itself into a center for offshore yuan trade following an agreement that was reached between Britain and China last year.
During a trip Osborne made in January to Hong Kong, the Hong Kong Monetary Authority and UK Treasury announced the establishment of a forum whose main topic of discussion will be the possibility of enabling London to use Hong Kong's clearing and settlement system. The forum is to hold its first meeting in May.
Fang Wenjian, general manager of Bank of China (UK) Ltd, said it makes sense for London to use Hong Kong's system at first. But that may change over time.
"In the beginning, it's better to take advantage of Hong Kong's system," Fang said. "But we should never underestimate London's own potential in conducting renminbi business. And we all believe that there's great potential for London to be an offshore center".
According to the initiative "London: a center for renminbi business", London was the site of 280 million yuan in commercial loans in 2011. The city was also the site of 88 million yuan in trade services and 16.3 billion yuan in import and export financing that year.
The report also found that $680 million in renminbi were spot traded in London each day on average, making up 26 percent of the $2.7 billion in the currency spot traded on average throughout the world.
Spencer Lake, a head of global markets at HSBC, said HSBC timed the issuance of its yuan bond to coincide with the publication of the report.
He said the bond is "not symbolic, it's real" and that European investors are already showing interest in it.
"The path is now open for other issuers to come in, particularly ones from Asia Pacific," Lake said. "So we've now created good momentum for others to take advantage of it."
Osborne said he thinks other banks and corporations will issue renminbi bonds, especially institutions from China.
A Chinese analyst, though, said London won't have much leeway to broaden its yuan liquidity pool since its 109 billion yuan in deposits are "still very small" compared with the 566 billion yuan that were in Hong Kong by February, Reuters reported.
London is gaining strength mainly because many Chinese State-owned enterprises have set up accounts there, said Liu Yuhui, director of the financial laboratory at the Institute of Finance & Banking at the Chinese Academy of Social Sciences.
"It's unrealistic to expect London to play a bigger role. The authorities are very concerned about risks brought about by the possibility of a large-scale yuan reflux in the future. And Hong Kong undoubtedly has better lines of communication with Beijing when some 'dangerous' capital flows are in need of being controlled."
Liu predicted Hong Kong will hold a 70 to 80 percent share in the offshore yuan business in the next couple of years.
In five years' time, Hong Kong will have between 2 trillion and 3 trillion worth of yuan deposits, he said.
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