Yuan raised offshore could result in more liquidity in China, report says

LONDON - London's hopes of soon becoming a center for the offshore use of the yuan have been impeded by the findings of a Bank for International Settlements (BIS) report on Sunday, experts said.

The skyline of London's financial district. London, Singapore and New York are all vying to become the next offshore center of yuan use, trying to follow the successful move Hong Kong made in that direction in 2009.[Simon Dawson / Bloomberg]

The BIS, which is a bank for various countries' central banks, warned that the offshore use of the yuan could undermine the Chinese government's work to control inflation.

That would happen, the BIS explained, if yuan raised through offshore yuan-denominated bonds were to re-enter China, injecting more liquidity into the country's economy.

"The (bank's) report reaffirms the belief that China probably will not develop the next offshore renminbi center soon," said Stephen Gallo, head of market analysis at the London-based financial-service provider Schneider Foreign Exchange.

"Given that China is currently facing the problems of high asset prices and hot money inflow, internationalizing the renminbi too quickly puts its central bank's ability to control credit at risk," said Gallo, adding that it may be another three to 10 years before the yuan can be traded in London.

London, Singapore and New York are all vying to become the next offshore center of yuan use, trying to follow the successful move Hong Kong made in that direction in 2009.

London's attempts to become a yuan center received a boost in September when Vice-Premier Wang Qishan met George Osborne, UK chancellor of the exchequer, and welcomed private-sector interests in the development of an offshore market in London.

"We agreed to collaborate on the development of renminbi-denominated financial products and services in London, and our regulators stand ready to support this market," the chancellor said at a news briefing following the dialogue.

But this "collaboration" has seen little progress so far.

Stuart Fraser, policy chairman at the City of London Corporation, the city's municipal government, wrote in an e-mail on Monday that London has advantages that give it a good chance of becoming a Western yuan hub.

Among them are London's "time zone", "legal and regulatory framework" and "experience of innovation and creating liquid, efficient markets".

Noting that internationalizing the yuan is "a stated priority of the Chinese government", Fraser said financial-services companies in London will benefit if the city becomes the next offshore renminbi hub. That's especially true for companies that deal in foreign exchange trading, banking, insurance and asset management, he said.

At the same time, Fraser declined to comment on the obstacles discussed in the BIS' report, other than saying they involve a "specific domestic issue" for China.

Fraser's views were shared by Gallo, who said "China can only accept London as a new offshore center for renminbi trading if it doesn't mind a more flexible renminbi exchange rate".

That may happen, he said, when China is better able to balance its exports and imports, but "London has to wait for now".

China's current asset bubble is not just discouraging for London. The report also says the yuan's rapid internationalization in Hong Kong may also give Beijing cause for worry.

Hong Kong's "dim sum" bond market, in which companies from McDonald's Corp to Caterpillar Inc have raised money, has expanded quickly in recent months.

About 76 businesses and institutions issued dim sum bonds worth 99.1 billion yuan ($15.56 billion) in the first 11 months of this year, 2.8 times the amount issued in 2010, according to the Hong Kong Monetary Authority.

"Assuming more cross-border capital mobility in the future, offshore bond issuance could spur an accelerated liberalization of the domestic bond market that could cost banks their best corporate borrowers in a few short years," the BIS said in its report.

"I believe that the continued internationalization of the renminbi means that China is getting closer to a pivotal moment," Gallo said.

Zhang Haizhou contributed to this story.