Yuan to Start Trading in London

British Chancellor George Osbourne was in Hong Kong on Monday for talks on establishing London as an offshore trading center for Chinese currency. Britain’s Finance Ministry will work with the Hong Kong Monetary Authority to facilitate private sector development of new systems and products denominated in yuan.

With China’s large share of world trade, Osbourne is optimistic about the opportunity for its currency on the world stage and says London can serve as a "gateway" to Western markets.

[George Osbourne, British Chancellor of the Exchequer]:
"In June last year RMB had a world foreign exchange market share of just 0.9 percent. This compares to China's share of the world's trade of 11 percent and I think London is perfectly placed to act as a gateway for Asian banking and investment in Europe and a bridge to the United States."

The move represents a step in further internationalizing the yuan, something that Chinese leaders have been pushing for since the aftermath of the 2008 international financial crisis. In 2009, governor of the bank of China Zhou Xiaochuan started suggesting moving away from the US dollar as the global reserve currency.

Yet if the Chinese yuan is to ever replace the dollar, it faces challenges and policy conflicts within the regime. Many US lawmakers believe the yuan is undervalued and some reformists in China are also calling for the currency to rise. But an undervalued currency benefits China’s exporters and many in the regime want to maintain the status quo.

However reformers argue for a rebalancing of the economy towards domestic consumption. If that happens and if imports increase, China would benefit from a stronger yuan. Chinese authorities have already been testing the waters with offshore yuan trading on Hong Kong. They have allowed an offshore version of the yuan to trade at a different rate to the onshore version, thus maintaining their competitive advantage with exports and allowing the yuan to trade freely, which would lead the currency to rise.

The city of London hopes to cash in on this offshore yuan trade and with China as the world’s biggest exporter, holding yuan does look like an attractive prospect to many central banks. But many are still skeptical about the yuan, which is still not fully convertible and the Chinese regime’s economic plans are far less transparent than those of Western countries.