Reuters: US Dollar Report: CNH Tracker-As London aspires to larger yuan role, Hong Kong only cements its lead

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CNH Tracker-As London aspires to larger yuan role, Hong Kong only cements its lead Oct 17th 2013, 04:47 Share this Email Print Reprints Thu Oct 17, 2013 12:47am EDT By Saikat Chatterjee HONG KONG, Oct 17 (Reuters) - London has stepped into a bigger role as an offshore yuan hub this week but its challenge to Hong Kong's entrenched position as a key player in the internationalisation of the Chinese currency is not likely to immediately dent the city's business. Some say that widening the net of yuan investors to London and Europe may benefit Hong Kong, a special administration region of China. The city enjoys close ties with the mainland and has already several years head start over rival regional centres for offshore yuan business China agreed this week to open up its markets for British-based investors in return for allowing Chinese banks to set up wholesale banking branches in London, easing regulations imposed after the financial crisis and opening the doors for more yuan trade to be settled in the city. By doing so, London joins a bunch of cities this year - Singapore and Taipei in Asia and Luxembourg and Paris in Europe -- vying to snatch a share of the lucrative offshore yuan business outside Hong Kong, rekindling fears that yuan business is slowly moving away from the former British colony. London, the world's largest foreign exchange centre, has seen a surge in yuan-related business and these latest developments are expected to accelerate that process. Import and export financing totalled 33.6 billion pounds ($53.52 billion) in 2012, doubling from 2011 while foreign exchange trading volumes in yuan nearly tripled in that period, according to City of London data. In nearby Luxembourg, about 24 billion yuan ($3.93 billion) worth of bonds are listed on its stock exchange, putting the country behind only Hong Kong and Singapore in terms of dim sum bond issuance with names such as Caterpillar, Volkswagen , Volvo and Alstom among others. While that rapid growth, albeit from a very low base, has made some market watchers nervous about Hong Kong's prospects, Andrew Main, managing partner at Stratton Street Capital, a London-based fixed income fund believes otherwise. "The rise of London means Hong Kong is going to benefit in the long term," said Main who manages $1.75 billion in funds of which $375 million are in yuan-related assets. "This will open tremendous interest in the Chinese currency as the pie only gets bigger." With London not appointing a clearing bank for yuan trade settlement for now, it is likely that invoicing may be routed through Hong Kong's clearing systems whose timings were recently expanded to overlap with that of London. While these new offshore centers look to Hong Kong for guidance, a bigger challenge nearby could be China's own efforts to prise open its markets via free trade zones. A new-launched free trade zone in Shanghai seems a greater threat that has prompted tycoons such as Hong Kong billionaire Li-Ka Shing to say it may affect Hong Kong heavily. But if the announcement around the Shanghai zone is any indicator, that day of reckoning is still far away. Not only were top government officials conspicuously absent at its launch, only two banks, Citigroup and DBS, grabbed this opportunity to set up a presence in the zone, an indicator of the opacity on what exactly the advantages are. Jonathan Fenby, director of China research at Trusted Sources, a London-based independent research and advisory house, said Beijing will not take risks on the reform front as they are faced with heavy challenges in reshaping the economy and breathing fresh life into the ruling party. China is expected to unveil concrete plans to retool its economy to rely more on consumption-driven growth and less on investment at a Communist Party Central Committee plenum in November. "In time, things may of course change, but for the moment, the Shanghai watchword seems to be: curb your enthusiasm," Fenby said. WEEK IN REVIEW: * Hong Kong has no immediate plan to adopt the Chinese currency as an alternative to its peg to the U.S. dollar even though the city is the key hub for widening yuan usage in global trade, Hong Kong's central bank chief said on Monday. If pegged to the yuan, a stronger Hong Kong dollar would have a far more corrosive effect on its exporters than the benefits to importers. * China's currency hit a record high below 6.10 per dollar this week as state run banks stepped back their dollar purchases from the currency market. Their absence coincides with data this week that showed Chinese exports fell this month, confounding broader market expectations of a rise. * China's foreign exchange reserves - the world's largest -grew by $160 billion in the third quarter, one of the largest increases on record. UBS strategists believe that the rise is a one-off event and reflects capital flows targeting more yuan appreciation and positions behind the much expected U.S. tapering being recalibrated. CHART OF THE WEEK:Offshore yuan bonds in Hong Kong have weathered an emerging market sell-off in recent months far better than its Asian counterparts thanks to a rock solid currency. The Chinese yuan remains the best performing Asian currency against the U.S. dollar this year. RECENT STORIES: CNH Tracker-Stable market, growing trade boost international use of yuanChina c.bank underlines reform push with record yuan despite weak exports More stories about the CNH market Daily onshore yuan reports Daily China money market reports Offshore yuan rate Onshore yuan rate Offshore yuan dealt Onshore yuan on CFETS THOMSON REUTERS SPEED GUIDES Link this Share this Digg this Email Reprints

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