The UK-China currency swap

By Tim Collard
0 Comment(s)Print E-mail, February 28, 2013
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Bank of England [File photo]

Bank of England [File photo] 

Amid the encircling gloom caused by the withdrawal of the U.K.'s triple-A credit rating, there has been one perceptible gleam of light: news that Bank of England (BoE) Governor Sir Mervyn King is negotiating the opening of a currency swap facility with the People's Bank of China (PBoC). And it can be presumed that the deal will go ahead; I don't think Sir Mervyn would have risked a massive loss of face by announcing his intentions without a fair degree of confidence that it will actually happen.

This would, of course, not be a unique event: China already has at least twenty currency swap agreements in place. But this is the first one with a major global trading partner. It will be an important milestone in the steady progress towards full Chinese participation in the international currency system and the emergence of the RMB as a world reserve currency. For some time now, no one has doubted that this must and will happen, as the lack of full convertibility for the yuan remains a solid obstacle to the long-awaited full integration of China in world markets. And most sensible people have sympathy for China's extremely cautious approach to issues concerning her currency; the benefits of the slowly-slowly policy were easily seen in the great financial crises of 2007-2008, which China was largely able to avoid. But, however slowly, progress must be made, and it is good to see concrete signs of it.

And this deal is quite a coup for Britain. For some years we have been in fierce competition with our European rivals (sorry, I mean partners) in our efforts to defend London's position as the European hub of financial markets, and the establishment of London as a steady source of renminbi finance will do much to offset the blow dealt by the downgrading of our sovereign credit. And, dare I say it, Britain has once more become a beneficiary of the euro on international markets.

And we don't often get to put one over on the Americans. This is one more example of the advantages of quiet constructive negotiation over megaphone diplomacy. In the strident atmosphere of the recent U.S. election campaign there were several raised fists and raised voices over China's currency management, with governor Romney threatening to declare a state of diplomatic hostility with China in an effort to force yuan revaluation. That isn't the way to do it. There is a Chinese saying: "We must ford the river by feeling for the stones," and a series of currency swap deals, which will gradually form a network sufficiently broad-based to circumvent most serious obstacles, is a more sensible way forward than expecting a comprehensive deal at one fell swoop.

This has been a studied and well-prepared British policy. In April 2012 the U.K. government opened up a facility in London to establish an offshore currency and bond trading market involving the Chinese currency. China Construction Bank has already issued a renminbi-denominated bond in the London market. The currency swap deal is the logical next step. I personally feel that U.K. dominance of international currency trading is a slightly mixed blessing, but it is one major advantage we have, so we might as well make the best of it. We will be happy to share the international renminbi trade with Hong Kong, to whom we are now second in the world in this area; the U.K.-China-Hong Kong nexus has a solid historical basis.

As I said above, it is easy to understand why China has been watchful and cautious in removing the restrictions on currency convertibility, which have been salutary on some recent occasions; but it is also easy to see that a currency policy originally modelled on those of the Soviet Union cannot possibly be appropriate for the twenty-first century. After all, Soviet bloc currencies had to be strongly protected because, in the outside world's terms, they were virtually worthless; it was forbidden to hold Soviet-bloc currencies outside the Soviet bloc, but then whoever would have wanted to? This is very far from being the case with the renminbi. But, whether a currency is wanted by everybody or wanted by nobody, adjustments still require careful handling.

But I am very glad to see that the Sino-British agreement is likely to alleviate the difficulties in currency conversion which have persistently complicated the integration of the newly resurgent PRC in the networks of international trade. This is a deal where both sides win: Britain hosts the business, and China can trade in her own currency with a greatly reduced risk of trading partners being deterred by fears over liquidity. Well done PBoC and BoE!

The author is a columnist with For more information please visit:

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