Demand for China bonds in the UK set to soar

Trading offshore renminbi (RMB) in London will become much easier when Hong Kong clearing hours are extended, David Pavitt, head of emerging markets foreign exchange trading at HSBC, said.

HSBC is Europe’s biggest bank and has a sizeable presence in Asia.

Mr Pavitt said corporates, investment institutions, pension funds and suchlike, as well as investors in China, were likely to want so-called “dim sum” or yuan-denominated bonds.

“I’m an FX trader, but I anticipate a massive demand,” he said.

“London is the preeminent FX trading centre for every other currency... I anticipate London taking its place in the renminbi market as it has done with every other currency.”

He expects Chinese interest rates, which are generally lower offshore, to converge with onshore rates as China gradually allows the currency to flow more freely across borders.

Authorities have moved slowly in internationalising the RMB because of fears of instability, but recently a series of measures has helped the process quicken.

Last week, Chancellor George Osborne signed an agreement with the Hong Kong Monetary Authority to make London an offshore trading centre for the renminbi, opening discussions with Hong Kong on clearing and settlement arrangements and new RMB-denominated assets.

The HKMA said it hopes to extend clearing hours until 11.30pm – 3.30pm British time – by the end of June this year.

The Chinese currency has traded in London since 2010 and the UK capital has a share of around 15 per cent of the total volume of offshore renminbi trade, Mr Pavitt said, with corporates fuelling most of the demand.

Figures from SWIFT, a member-owned cooperative that provides a communication platform to banks, securities firms and corporates across the world, suggest London has in recent months nabbed an increasing share of RMB payments from other centres such as Singapore.

Having started off strongly early in RMB payments in early 2011, Singapore’s share declined from 52.9 per cent in the first quarter to 30.6 per cent in the fourth quarter, SWIFT said.

In contrast, London saw the strongest growth in RMB payments and saw its share increase from 22.1 per cent in the first quarter to 30 per cent in the fourth quarter, while in RMB FX transactions, the UK is already the biggest player other than China and Hong Kong.