And the winner is … London? The location of the second renminbi offshore trading centre

Abstract

Renminbi (RMB) internationalisation is at a new starting point for advancing further. Wider internationalisation of the renminbi necessitates enlarging the offshore basis. Hong Kong as the sole RMB offshore centre is not enough, given its limitations. This has sparked an intensive debate on where the next RMB offshore trading centre will be located. London has support from Chinese central government officials to develop into a second offshore RMB hub to complement Hong Kong. But other financial centres are also vying to become such a centre. A number of private-public initiatives have been launched such as the Hong Kong–London Forum (January 2012) and the so-called London-RMB Initiative (April 2012) to help realise that ambition technically. London offers a number of important advantages compared with other rivals. There is London’s dominant position as the world’s leading global financial centre, as well as the world’s largest foreign exchange market. London also has well-developed infrastructure, a trusted legal system and respected (sound) regulatory framework. There are the ‘natural’ advantages of London’s time zone, as well as English being the universal business language. Its attractiveness is further underpinned by key strengths such as size, depth, breadth as well as the high degree of openness of its financial markets. London is clearly making a big effort to establish itself as an offshore RMB centre for the west. A significant amount of RMB business is already being done in London. The City, however, encounters a number of obstacles that pose challenges for RMB business in London. These include the lack of RMB liquidity, absence of a clearing and settlement system for RMB repatriations in London, and the lack of a natural customer base for RMB. A more recent challenge for London is the expected end of appreciation for the RMB.