Mighty yuan emerges as a reserve currency

Just as China’s growing international presence offers challenges and opportunities for Ireland in aircraft leasing, another booming area is in services related to the world’s fastest-growing currency, the Chinese renminbi or yuan.

The yuan is still not convertible but it is starting to emerge as a world reserve currency. China plans to make the yuan convertible in some form as early as 2015, eventually putting it on a par with the US dollar, and has pledged to support offshore yuan hubs as it encourages greater international use of its currency.

Global financial centres such as Singapore and London are keen to build on the rapid growth of the offshore yuan bond market, which is dominated by Hong Kong.

Taiwan last month was named an offshore yuan trading centre, a further step in Beijing’s efforts to boost the currency’s global reach, while simultaneously forging deeper economic integration with its cross-Strait rival.

Last week, China named Industrial and Commercial Bank of China (ICBC) as the clearing bank for offshore yuan business in Singapore, which will let the city-state compete more aggressively with other centres in the market for yuan-denominated trades and financial products. Hong Kong has a definite head start. It has been accepting yuan savings from individuals since 2004 and offshore trading of the currency began in the city in 2010.

Britain’s chancellor of the exchequer George Osborne has made various bullish statements as he pushes for London to become an offshore centre for yuan trading in tandem with Hong Kong.

Swap lines

The Bank of England said in January that it was ready “in principle” to help the City of London to adopt a currency swap line with the People’s Bank of China, which would help the city become a global trading centre for the yuan.

China Construction Bank and HSBC already use London to list their yuan-denominated bonds.

The currency line swap would be the same as those for freely traded currencies such as the dollar, euro and Japanese yen.

China has agreed swap lines with more than 15 other countries but these tend to be emerging economies that have natural resources or goods used in manufacturing to export, and does not include the US, euro zone countries or Japan.