The Chinese currency is fast gaining weight, reports Diao Ying in London.

If there is one thing in common between fashionable youths in hot pants flocking to high-end department stores in London and bankers in dark suits walking in and out of skyscrapers in the city’s financial district, it might be their growing interest in the Chinese currency. During the holiday celebrating the Queen’s Diamond Jubilee, Harrods, a department store known for its ties with the British royal family, launched a weibo, the popular Chinese social media platform, to attract more Chinese customers. Shoppers from China can find “the very latest, limited edition and exclusive products” with Hermes, Chanel and Louis Vuitton among the most popular brands, according to the store’s spokesman.

More than 100 UnionPay payment terminals in the store are also helping make Chinese shoppers feel more at home. Through the machines, people from China can pay for their handbags and shoes using the same bank cards as they do at home.

A few blocks from Harrods, an advertising hoarding featuring a green jade dragon shaped like the yuan sign stands outside a bank. The words read:“A new global currency is emerging. Be part of it.” The commercial comes from HSBC, a bank rooted in the silk, tea and opium trade between China and Britain in the 19th century.

The UnionPay terminals, jade dragon advertisment as well as shops around the corner on the streets of London offering exchange services between the British pound and the yuan are the tip of the iceberg in the biggest story in the financial market today: the internationalisation of the Chinese currency.

As people search for a bright spot amid sluggish economic growth in the West, beset by the European debt crisis, companies, investors and financial institutions are focusing more on the Chinese currency. From Beijing to Hong Kong and from Tokyo to London, policymakers and businesses are part of the push.

There are several driving forces behind this, both at home and abroad. The People’s Bank of China, the nation’s central bank, has made several moves this year to liberalise the exchange rate. George Osborne, the UK Chancellor of the Exchequer, took the initiative to grow London into an offshore trading centre for the yuan earlier this year. This month, the yuan became convertible with the Japanese yen under an agreement between the Chinese and Japanese governments.

“All of it demonstrates that the Chinese government is pushing forward the internationalisation of the RMB and encouraging the use of RMB offshore. That will help the global economy in many ways,” said Adam Tyrrell, head of European capital markets for Standard Chartered in London.

From greenback to red

These initiatives will have a profound influence on the development of trade. For instance, China and Europe are the biggest trading partners, but the bulk of that trade has been settled in the US dollar. If a Chinese company buys pork from a UK firm, it does not buy and sell in yuan, the British pound or the euro. It settles in dollars.

That paradox is changing. Now the same pork company can open a yuan account in a British bank such as HSBC or Standard Chartered, or a Chinese bank that operates in Europe, such as the Bank of China or the Industrial and Commercial Bank of China. It can then invoice the goods or settle the deal with its Chinese clients in the Chinese currency.

The advantage of this is clear: Settling in yuan can help both sides avoid foreign exchange risks and reduce transaction costs. For instance, in 2008, many Chinese companies in southeastern China had to lay off workers and close factories as the appreciation of the currency caused them to lose money. The situation would be different if the contracts were signed in yuan, meaning that they would have a fixed value no matter how the exchange rate changed.

The initiative can also benefit companies outside the European time zone, given London’s position as the world’s foreign exchange centre.

“The beauty of London is not just about London,” said Patrick Law, Hong Kong-based managing director and head of trading for Greater China with Barclays. “If you look at the London time zone, it covers both northern hemisphere and southern hemisphere.” And that means it will also help facilitate the business between China and Africa and the Middle East.

“Africa is a very interesting market to look into because China and Africa have a lot of business together,” Law said. He added that Barclays, the bank with strengths in commodity trading, started doing trade between the South African rand and yuan from April.

From Uncle Sam to dim sum

The internationalisation of the renminbi will also offer a new platform for companies and investors looking for an alternative way of financing.

The “dim sum bond” got its name from delicacies in Chinese cuisine such as spring rolls, shrimp dumplings and steamed buns. It refers to bonds denominated in yuan and was first started in Hong Kong when the city became the first offshore centre for renminbi trading. It has become increasingly popular outside Asia and grew very rapidly last year in Europe, according to Tyrrell from Standard Chartered.

British banks were involved in five dim sum bond deals last year from European companies and financial institutions. It has been involved in three client deals this year, according to Tyrrell.

“Over time, as the RMB is used more, there will be more European corporates and financial institutions interested in transacting in RMB, either for their China business when they can remit onshore or as a way of diversifying their investor base,” he said.

The motivation for getting involved in dim sum bonds is also changing, he said.

When the RMB market first developed offshore, a lot of the investors were looking for a currency play rather than a bond play. At first, investors were looking to invest in renminbi because they thought it was going to appreciate.

“Over time it is developing into a more mature bond market,” he said. “It will tend to be more driven by traditional bond market influences.”

Particularly this year, because of the overall global economy, if the investor sentiment is not there, there will be fewer bond issuances, he said.

“There is definitely momentum in RMB. It will not stop. It will grow.”

Opportunities and problems

Given the fact that the yuan is still not fully convertible, there is a lot of work to be done to make people hold it and do business with it, as they do with dollars.

For London, the main issue in developing it into an offshore yuan trading centre is the lack of liquidity. That is both due to people’s lack of knowledge about the yuan market and limits in infrastructure to facilitate the trade flows. “Without liquidity, we cannot grow the pie and make the market more efficient,” Law said.

“Everybody is definitely very interested. The current situation is that people have just started looking into it,” he said. “The involvement is still relatively small, but the amount of interest is actually very high.”

Some suggest that the pool of yuan liquidity in London can grow through many different sources. For instance, Standard Chartered recently issued yuan-denominated European Commercial Paper, or ECP, to investors in Europe.

“ECP is issued to investors. Then Standard Chartered holds the liquidity in RMB and can use that for trade finance. This will help increase trade flows with China for European clients,” Tyrrell said.

“As investors feel comfortable holding RMB, that will help build liquidity here.”