Rich credentials and familiarity give British capital an edge over the competition

As the Chinese authorities continue to internationalize the renminbi with steps to facilitate its use in Europe, it is important to reassess the position and strength of London as a yuan-trading center.

Though London is a premier and long-established financial center, it is often seen as heavily regulated, unhelpful and drifting away from the rest of Europe.

However, it is also important to remember that the primary goal of the Chinese authorities is to make the renminbi a leading, normal currency for the settlement of international trade and finance. London has the advantage of being the largest international cross-border foreign exchange center in the world. There is a huge and well-established commercial banking and settlement system in London, which deals in all types of international currencies. If the renminbi is added to this it will boost cross-border currency trade and consolidate London's position as a leading foreign exchange center.

The second element of internationalizing the renminbi has been the creation of the offshore yuan bond market. This originated in Hong Kong but is an offshore Chinese market, rather than being just a Hong Kong phenomenon. Again London has a great advantage since it has a huge and well-established capital market.

Since the establishment of the euro-dollar in the 1960s and the euro bond market, London has been the leading center for underwriting cross-border debt securities transactions.

It has a large number of investment bankers, lawyers and accountants and other professionals all well experienced in these transactions. It also has an established institutional infrastructure for investment banks.

The more the renminbi becomes a normal bond currency, the better London's credentials are to underwrite and lead manage. There is a large liquid over-the-counter securities trading market where most secondary sales of bonds take place, rather than across stock exchanges.

The "normality" of doing things in London is shown by the recent renminbi bond issue by IFC, a part of the World Bank, which was organized by banks in London, listed in London and cleared though the usual European systems.

The United Kingdom Chancellor of the Exchequer, George Osborne, supports development of the use of renminbi in London. This gives a degree of political will that is helpful in addressing barriers.

The competition that London faces cannot match London's long established and large forex and bond markets but they can point to other features.

London to some extent is and, more importantly, is seen as, more difficult to deal with. On the personal level issues such as visas and immigration, the cost of property and so on make Luxembourg and others look more attractive.

At the institutional level the United Kingdom may be stricter in regulatory terms than other centers. As regards stock exchange listings of bonds offered to professional investors only, Dublin and Luxembourg are more flexible and easier to deal with than the London bourse.

Smaller countries may be able to show more political commitment and responsiveness than the United Kingdom. The Chinese authorities are likely to want to see a number of centers develop (Hong Kong, Macao, Singapore and Taipei have all been permitted in Asia) to avoid the risk of concentration and also to hedge against the possibility of the United Kingdom leaving the EU and so impacting its role in European finance and trade.

The challenge to London is to demonstrate that its established forex and investment banking services, secondary market trading role and contacts with investors worldwide are far more significant than visas, investment management regulation and listings on stock exchanges where no trading of debt securities takes place.

There have already been steps to promote the use of renminbi in London. In January, Bank of China issued 2.5 billion yuan ($413 million) worth of yuan-denominated bonds through its branch in London and indicated that the proceeds would support the further development of the London offshore RMB market.

Chancellor Osborne has also spoken about his government's keenness in welcoming other Chinese lenders to London to further promote the renminbi initiative.

Another initiative being pursued is the establishment of renminbi clearing in London. All renminbi transactions in London are now settled through Hong Kong.

The introduction of settlement in London, which will require a direct link between the London settlement bank and the People's Bank of China, would be a very significant step in establishing London as the leading Western renminbi hub.

It would make renminbi transactions directly available though banks in London - a familiarity factor that can only increase the uptake of the currency by corporate treasurers, funds and others used to banking in London.

Second, it would send a strong signal that the Chinese authorities support London in developing the internationalization of the renminbi.

The author is a capital markets partner for Linklaters, a law firm.

(China Daily European Weekly 03/14/2014 page19)