London to become the international trading centre for the yuan

17th January 2012

Chancellor George Osborne is in the far east – on a three day mission to Asia, stopping off at Hong Kong, Beijing and Tokyo. The idea is to expand trade – currently the UK exports less to China, Hong Kong and Japan combined than to Switzerland with its comparatively miniscule population.

The trip has garnered – as all these voyages tend to do – lots of headlines, especially in TV and radio where the visuals and the words can matter more than analysis. But with potential doubts over the real value of these flying visits, many see these missions as little more than a distraction or diversion. Osborne's latest overseas venture comes against the background of the continuing euro crisis and a new UK specific recession warning.

No one's betting the bank on Osborne turning Asians into consumers of British goods as a Telegraph blog points out. Mindful Money reported earlier this month how sales of German-owned but British built Bentleys were higher in China than in the UK. But other than some individualistic top of the range cars, Scotch whisky and real Mulberry handbags (you can buy fakes in any market in China) it is hard to see what the UK has to export that Asians want to import.

As many point out, the main purpose for the Chinese is buying anything from the UK is to see how it works and then do better themselves. And with a highly educated workforce, Asians hardly need our "knowledge" economy.

The Guardian is equally cynical about the value of the Osborne mission, suggesting it is a public relations exercise to ensure he is out of the country and able to spin something about UK trade at a time when the UK economy is going again into reverse.

But Osborne will come back with something to boast about. And that is a new deal for the City of London to become the international trading centre for the renminbi, the Chinese currency, known better to the Chinese as the yuan.

Bloomberg Businessweek says: "Closer financial links with the world's fastest-growing economy may help buffer Britain's economy against turmoil in Europe, where nine countries were downgraded. Osborne is relying on trade to boost an economy with record levels of consumer and public debt and an austerity program that is sapping consumer confidence and exacerbating unemployment."

There will be a twice a year forum to look at clearing and settlement systems, market liquidity and the development of new yuan products, according to the Hong Kong Monetary Authority. HSBC Holdings Plc, Standard Chartered Plc and Bank of China Ltd. and other banks will join. Hong Kong authorities plan to lengthen yuan payments trading by five hours by June, allowing London-based institutions the opportunity to expand their 30 percent share of trading outside the Chinese mainland.

"London now has a unique opportunity," Peter Sands, chief executive officer at Standard Chartered, said in the Treasury press release. HSBC Chief Executive Officer Stuart Gulliver also said in the statement that London can become the "premier offshore trading center for the renminbi."

That will be good for the forex departments but how that will affect the wider UK economy is unknown and probably unknowable.

Equally uncharted is the value of these trade missions in themselves. Leaving aside their news value, do they create more trade, favour the visitor over the home team or vice versa, leave things much as they were or make matters worse?

There is generally a paucity of academic research on this – it can be hard to show any real effect, positive or otherwise and while ministers can usually point to something to justify those first class air fares, it might have happened anyway.

However this paper is one of the few that has tried. It's Canadian but there is little reason to think that other countries have a substantially different experience. It concludes: "The missions do not seem to have increased an increase in trade. Trade missions generally have small, negative and mainly insignificant effects."

Charlie Awdry, the manager of the Henderson China Opportunities fund poses a line of questioning. He says: "Osborne's speech included a line on "As well promoting British investment in Asia, we are actively seeking Asian investment in Britain and its infrastructure. Here and in Beijing I will be promoting infrastructure as just one of the opportunities the UK brings for Chinese investors, following the lead taken by Hong Kong's own Cheung Kong Group, the largest overseas owner of UK infrastructure."

Awdry's question is: "Perhaps we British know that foreign companies provide services in our infrastructure industries but do we British know that this includes some Chinese and Hong Kong businesses? The company Mr.Osborne is referring to owns Northern Gas Networks, Seabank Power, Cambridge Water and Southern Water.  It's a global trend that Chinese businesses are looking to acquire assets.  So are we ready for it? "

Awdry's question poses another.  Will the opening of the UK to Chinese infrastructure businesses offset any gains to the City of Chinese currency trading?

Meanwhile IFAs, fired up by the coming Chinese Year of the Dragon (considered lucky in the Chinese zodiac) on January 23 if not the Osborne visit, seem more enthusiastic about China than the UK.

Darius McDermott at Chelsea Financial Services says:

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