Recent news of the UK’s intention to establish a currency swap line with China will undoubtedly generate more cross-border M&A activity between the UK and China.
Although China is now the second largest economy in the world, the yuan or renminbi (RMB) as it is more formally known is yet to become a freely convertible currency. In an effort to internationalise China’s currency, The People’s Bank of China (PBoC) has signed in the region of 20 bilateral currency swaps with various countries around the world. Although the majority of these swaps have been established with emerging countries, the list includes the advanced economies of Australia, Japan and Singapore.
London is already an incredibly important financial centre for the RMB and adding the UK to the swaps list would be a substantial step forward in China’s plans to eventually hold a world reserve currency. The agreement would also place London as the leading centre in the Group of Seven industrialised nations for offshore trade in the yuan, and very importantly as a hub for Europe. Conscious of the ever increasing importance of the Chinese economy, in April 2012, the UK government opened up a facility to establish an offshore currency and bond trading market involving the RMB, and has already seen evidence of a significant increase in reminbi trade in London.
The agreement between the UK and China will be a reciprocal three-year yuan-sterling swap and will be used to finance trade and direct investment between the UK and China and to support domestic financial stability if and when needed. “In the unlikely event that the generalised shortage of offshore renminbi liquidity emerges, the Bank (of England) will have the capability to provide renminbi liquidity to eligible institutions in the UK” said BoE Governer Mervyn King. Increased liquidity will help to boost the services that banks can offer to companies doing business with China.
It goes without saying that UK businesses exploring China as an option either in terms of a trading partner or in M&A, will be very much in favour of this latest development.