London promotes yuan trading

China’s central bank appointed Bank of China Ltd.’s Frankfurt branch as the first institution in the euro (CME:E6N14) area able to clear payments in the country’s currency on the day yuan (CME:QTN14) trading started in London.

The selection of Bank of China, announced today by the People’s Bank of China, will help create a second European hub for yuan trading as the nation promotes greater use of the currency in global trade and finance. China Construction Bank Co. was yesterday named the yuan clearing bank for London.

“The London and Frankfurt hubs will complement each other,” David Pavitt, head of RMB Development for Europe, Middle East and Africa at HSBC Holdings Plc, said by phone from London. “The setting up of two hubs creates easier and more flexible access for local institutions.”

The German and Chinese central banks agreed on March 28 to cooperate in the clearing and settlement of transactions in the yuan. The Bank of China’s Frankfurt unit planned to hire about 20 people and to increase equity by 1 billion yuan ($161 million) in its bid to become the city’s clearing bank, Li Guang, the lender’s head in the German city, said in a May interview.
 

‘Another Milestone’
 

“The nomination of Bank of China is another milestone on the road toward creating a renminbi trading center in Frankfurt,” Joachim Nagel, a member of the Bundesbank’s executive board, said in a statement today.

Since March, three issuers have sold yuan-denominated debt in Frankfurt. AAA-rated German lender Kreditanstalt für Wiederaufbau sold 1 billion yuan of notes on April 28. That was followed by a 1.2 billion-yuan sale by Agricultural Bank of China Ltd. on May 9. China Construction Bank raised 1.5 billion yuan on May 19.

Today’s move “will increase confidence in the use of RMB for trade-related activity,” Evan Goldstein, Deutsche Bank AG’s global head of renminbi services in Hong Kong, said by e-mail. “It will also enable a more efficient transfer of funds within the European time zone.”

The PBOC and the European Central Bank agreed in October on a bilateral currency swap line to encourage greater use of the yuan in trade finance. The swap agreement provides the ECB with a backstop of 350 billion yuan.
 

U.K. Advantage
 

Only Chinese lenders have so far been appointed as clearing banks in the offshore market. Bank of China is the clearing bank for the yuan in Hong Kong, Macau and Taipei, while the mandate in Singapore went to Industrial & Commercial Bank of China Ltd.

The U.K.’s accord yesterday made it the first European country to allow direct exchange of the yuan. Direct trading of the yuan-pound pair started today.

Premier Li Keqiang this week said his goal was to expand trade with the country to $100 billion by the end of 2015.

The pound (CME:B6M14) is the fifth major currency to trade directly against the yuan in Shanghai, joining the Australian and New Zealand dollars, the Japanese yen and the U.S. dollar, and beating plans by Singapore and South Korea.

The yuan overtook the euro in December to become the most-used currency in global trade finance after the dollar, according to HSBC.

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