Lawyers give Osborne RMB plan stamp of approval

The UK Treasury’s plans to make London the leading international centre for trading China’s currency, the renminbi (RMB), have been welcomed by finance lawyers.

The new initiatives were announced by Chancellor of the Exchequer George Osborne today during an official visit to Hong Kong. Osborne wants to strengthen the UK’s partnership with the Hong Kong Monetary Authority (HKMA) and develop London as the major centre for trading the Chinese currency outside China and Hong Kong.

One of the initiatives is the launch of a joint private-sector forum, to be facilitated by the UK Treasury and the HKMA, which will focus on exploring synergies between the UK and Hong Kong. It will specifically look at clearing and settlement systems, market liquidity and the development of new RMB-denominated products.

“London is perfectly placed to act as a gateway for Asian banking and investment in Europe… and is the world’s largest centre for foreign exchange,” said Osborne. “London and Hong Kong are uniquely placed to assist in the development of this exciting market.”

Today’s agreement follows the UK’s landmark agreement with the Chinese government on the development of the offshore RMB market in London last summer.

Linklaters’ head of Asia capital markets Andrew Malcolm hailed the announcement as a significant development. “It’s exciting news and it makes perfect sense for London, which is the world’s largest foreign exchange centre, to be brought into the RMB system. It is also a sensible step forward for the internationalisation of the currency,” said Malcolm.

Malcolm also noted that the new initiatives will increase the liquidity of the offshore RMB market and promote offshore RMB-denominated financial and investment products in the global capital markets, particularly capital raising for offshore RMB bonds.

Linklaters has been an active player in the issuances of offshore RMB bonds in Hong Kong. The firm has been involved in a long list of transactions, including the issuances by foreign issuers such as Hopewell Highway Infrastructure, Tesco, L’Air Liquide and Caterpillar Financial, as well as Chinese companies such as Baosteel Group (13 December 2011) and Agricultural Development Bank of China (16 January 2012).

“The Hong Kong government’s goal is to develop an offshore RMB market similar to the Eurodollar market in London. So London is always an important piece in the process,” said Linklaters Hong Kong partner William Liu, who was the lead partner in most of the firm’s offshore RMB bonds transactions.

“The offshore RMB market has been developing rapidly. But its investor base remains Asia-centric. The closer collaboration between London and Hong Kong will encourage the vast pool of institutional investors and funds managers in the UK and Europe to participate in this emerging market. That’s another interesting aspect of the development,” Liu added.

Andrew Heathcote, a Hong Kong-based partner in Freshfields’ finance practice group, echoed the views of Malcolm and Liu. “This is a big step in the overall gradual internationalisation of RMB and a recognition of London as a global financial centre. It is very positive for London,” said Heathcote. “Up until now, the pilot scheme by the PRC government to internationalise its currency was very much focused on Hong Kong.”

Although it is still too early to say how the new initiatives will impact on the market in details, the continued expansion of the offshore RMB market will undoubtedly create more work and activity for finance lawyers in London and Hong Kong.

“Since the steps have been taken over the past 18 months by the Chinese government to internationalise RMB with the cross-border trade settlement pilot scheme and the offshore RMB bonds issuances in Hong Kong, there has been a significant level of activity and rapid growth in that area,” said Heathcote.

“It’s certainly true to say that London’s participation will spur continued growth in interest from international businesses with operations in or revenues from China in offshore accesses to RMB trading and financing.”