London as China’s leading RMB offshore center

President Xi’s state visit to the UK heralded the issuance of sovereign debt in renminbi (RMB) in London and the rise of the UK as the first overseas RMB centre to open an RMB sovereign debt market.

Only a decade ago, China’s bond market was still small. Today, it is the third largest in the world, behind the US and Japan.

Starting from US$58 billion in 1997, it soared to US$5.3 trillion in the first quarter of 2015. Yet, foreign ownership of Chinese bonds remains minimal at around 2%.

Last autumn, the Shanghai-Hong Kong Stock Connect opened China’s markets to Western investors, via Hong Kong. However, it also led to the idea of a Shanghai-London Connect, which would replace Hong Kong with London in the West.

But Cameron and Osborne are aiming even higher.

Today, there are four major international reserve currencies: the US dollar, the euro, British pound and the Japanese yen. In early August, the IMF was asked to delay its RMB inclusion until September 2016. Even if China misses the cut in fall 2015, an interim review could grant the RMB a reserve currency status before 2020.

In the long-term, the endorsement by the IMF could unleash a reweighing of the global reserve portfolio, which today amounts to US$11.6 trillion.

Non-public, private investors would follow in the central banks’ footsteps. If, initially, the RMB amounted to 10% of the IMF reserve currency basket, along with Japanese yen and British pound, some 10% of the global reserves - over US$1.1 trillion - could flow into RMB assets.

Ménage à trois

In barely half a year, London has moved rapidly, while Brussels has been first consumed and then near-paralysed by geopolitical issues.

What the UK has achieved as a single EU economy - greater participation of China in infrastructure and finance - a proactive EU policy should have had the foresight to conceptualise and execute in Europe after the 2008-2009 global crisis and certainly in the aftermath of the 2010 EU sovereign debt crisis.

Timing matters.

This commentary was released by EUobserver on Oct. 20, 2015

The author is a columnist with China.org.cn. For more information please visit: http://www.ccgp-fushun.com/opinion/DanSteinbock.htm

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