New platform in UK to boost RMB internationalization

Next month, Shanghai Clearing House will launch China's first cross-border foreign exchange clearing platform with a London partner to support China's further capital market liberalization and renminbi internationalization.

Announcing the news in London Tuesday, Shanghai Clearing House said it will launch the platform in partnership with the London-based R5FX, which is a clearing platform for emerging markets' foreign exchange trade.

While Shanghai Clearing House will provide trade clearing infrastructure within China, R5FX will provide clearing infrastructure in London and other international markets in which it operates.

The new platform is seen as a vote of confidence in London's status as a leading international financial hub despite Brexit uncertainties. It builds on increasingly strong China-UK financial collaboration during this “golden era” in the two countries' relationship, which began with President Xi Jinping's state visit to the UK in October 2015.

“We have chosen London because it is a leading international foreign exchange hub with 40 percent of global foreign exchange trading,” said Cheng Leilei, general manager of the product development department at Shanghai Clearing House.

Effectively, the new platform allows China's onshore banks to trade with overseas banks. Initially they can trade currencies, but over time products such as bonds and derivatives could be added.

Without the platform, Chinese and overseas banks would need to invest significant time and efforts into finding counterparties willing to accept their trades, negotiating the prices of the trades and bearing counterparty risks.

The new platform acts as a marketplace that creates an introduction and transparently helps them to price the trades, bear the counterparty risks, and provide additional liquidity.

Jin Mei, the People's Bank of China's chief representative in Europe, said the new service can help to increase the renminbi's further offshore trading and investment activities, which will also bolster China's capital market liberalization.

“China has decided to continue opening up. In the last several years, the PBOC has taken effective steps to reduce forex control and promote renminbi convertibility in a prudent manner,” Jin said.

Jinny Yan, chief China economist at ICBC Standard Bank, said the new service will help to grow London's momentum in offshore renminbi trading and investment.

Currently London is the biggest offshore renminbi foreign exchange trading hub outside Asia. Data for the first quarter of 2017 collected by the Society for Worldwide Interbank Financial Telecommunication showed that 36.3 percent of global offshore renminbi exchange transactions were conducted through London.

Hu Jinming, co-head of treasury at the China Construction Bank London Branch, the officially appointed renminbi clearing bank in the UK, said the bank will provide settlement support for the new Shanghai Clearing House service. In addition, it also looks to participate in this new cross-border foreign exchange market as a trading party.

Founded in 2009, Shanghai Clearing House clears bonds, interest rates, foreign exchange and exchange rates, and shipping and commodity derivatives. In March it established its first overseas office in London.