This swap line has been viewed as important for developing the RMB market, particularly in China more than in Britain, said Mark Boleat, policy chairman at the City of London.
“We tend to take more of a pragmatic view in Britain that these markets will develop on their own, but it’s certainly helpful to have a swap line and it’s an indication of official support and we were very pleased that it was announced,” he said in an interview with Asiamoney PLUS.
“It might be that it’s never needed, but the important point is that banks know that if they need liquidity it will be available. It’s a good guarantee to the market.”
This is one of a series of changes that the Bank of England has been considering in order to improve London’s competitiveness as an offshore RMB centre. It is important that the UK capital stays ahead of the game, particularly in the face of competition elsewhere in Europe, Boleat said.
“The problem is that there are costs of doing business [in London] compared with Luxembourg. All other things being equal the Chinese banks would like to be in London, but most of them have got business in Luxembourg too. The question is where they put particular bits of business,” he said.
“There’s a real wish to make sure we get it right — the BoE recognises its responsibility to keep London competitive and it’s no good, as we say in Britain, having the stability of the graveyard.”
Room for improvement
There are several areas that could be developed over the next few months. The first is that Chinese banks and other foreign lenders currently have to operate as subsidiaries rather than branches.
“That’s been an issue of concern — the chief executive of the Prudential Regulation Authority made a speech last week that covered this area, saying that the Balkanisation of banking regulation has gone too far,” said Boleat.
“We’ve taken that as a signal that the issues are understood, and that while there is a case for requiring a retail business to be a subsidiary; for the respective wholesale business there might be different arguments. We know the BoE is considering this issue and we hope to see some changes that will make London even more attractive.”
Another debate, as reported by Asiamoney PLUS earlier this week, has been over whether or not London needs its own clearing system. Boleat believes there is no need for one at the moment.
“Market participants tell us that the system in Hong Kong is working effectively and that is all they need at present. But this is not a philosophical or a religious point of principle, if it is felt that there should be some other arrangements in Britain, then certainly we’d look at them,” he said.
“We’re clearly looking at the development of the new system in China which is due to come on-stream next year. In London we’ll just want to make sure that we’ve got all the infrastructure we need to make the market work effectively.”
Another important task, he said, is educating the banks about the benefits of RMB-denominated transactions.
“As well as making sure we can meet the demand, we’ve also been keen to increase the demand. Compared with invoicing or paying in dollars there’s quite a substantial cost benefit to doing China based business in RMB. The smaller companies are very reliant on their banks, so if the banks say it is easy, [companies are more likely to do it],” he said.
His priority is increasing the use of RMB in trade finance. The dim sum market, he said, is of secondary concern.
“I’m sure that will come with time. There were a couple of bonds [issued by HSBC and Standard Chartered] that were partly toe in the water and looking at the appetite for it,” he said.
“But for the moment I think most banks and other potential issuers are taking the view that this is not the most effective way to raise funds.”