Bank of England, PBOC close to RMB/GBP swap agreement

The Bank of England and the People's Bank of China are close to signing an agreement on a renminbi/sterling swap arrangement

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The arrangement would be for a reciprocal 3-year swap which would be used to finance trade and direct investment between the two countries, and "to support domestic financial stability should market conditions warrant," the Bank of England said in a statement.

It said the two central banks were working together to sign the final deal "shortly" but did not give details about the size of the deal.

If the agreement is signed, the UK would become the first Western G7 member with whom China has such an agreement. Japan became the first G7 country to begin direct trading of the Chinese yuan, or renminbi (RMB) last year in Tokyo.

Since the financial crisis hit, China has accelerated the internationalization of the RMB, and has signed currency swap agreements with many emerging countries including Argentina, Brazil, Belarus, Chile, Indonesia, Malaysia, Russia, Turkey and Uzbekistan. It also has an agreement with Australia.

China and Japan began direct trading of Chinese yuan and Japanese yen in Tokyo and Shanghai on June 1, 2012.

The establishment of a RMB-GBP swap line will support financial stability in the UK, Bank of England Governor Mervyn King said in a statement.

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"In the unlikely event that a generalized shortage of offshore renminbi liquidity emerges, the Bank will have the capability to provide renminbi liquidity to eligible institutions in the UK," King said.

PBOC Governor Zhou Xiaochuan met King on Friday during the Bank of England governor’s visit to Beijing.

London launched an offshore RMB currency and bond market last year and some major corporations such as BP and HSBC have issued yuan bonds that are listed on this market.

The volume of trade services, import-export financing and letters of credit in RMB in London increased strongly - albeit from a low base – in the January-June period of last year compared with the 6-month average for 2011, according to data from the City of London.

Trade services grew by 390% to 2.2 billion yuan ($352.5 million) and the volume in letters of credit grew 20 times to 3.7 billion yuan.

Average daily volumes of spot forex grew to $1.7 billion in the first 6 months of 2012 from $680 million in 2011, the data showed. Import-export financing volume was 10 billion yuan.

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