China’s state owned currency marketplace, the China Foreign Exchange Trade System, is preparing to open new branches in London and New York, as part of efforts to promote the Yuan’s global status. This move may signal towards the country loosening its capital controls in order to allow more foreign participation in its onshore Yuan market. The China Foreign Exchange Trade System (CFETS) is a subsidiary of China’s central bank which provides financial services such as trading and benchmark services as well as training facilities to the interbank lending, bonds, and foreign exchange markets. It provides an electronic bidding system for the Yuan against foreign currencies and also offers cross-rate trading, as well as RMB interbank lending and bond trading. In a recent statement, the CFETS claims the move may further strengthen cooperation with overseas trading platforms with the aim of eventually providing trading services 24 hours a day, seven days a week.
Founded in 1994 as an outcome of forex system reform, CFETS is the only foreign exchange and interbank money market in China. Created and governed by the People’s Bank of China. At the moment, instruments traded at CFETS include cash foreign currencies such as the US Dollar, Japanese Yen, the Euro, and the HK Dollar alongside Chinese Renminbi. CFETS is headquartered in the financial district of Shanghai and there are many other centres in other provinces in China such as Chengdu, Guangzhou and Shenzhen. Overall, China’s banking industry remains in the government’s hands however banks are gaining more autonomy. The big four banks currently in China are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China. The People’s Bank of China or the central bank, formulates and implements monetary policy. It has full autonomy in setting interest rates for commercial banks and trading in government bonds.
According to a paper by Yongding Yu, the People’s Republic of China (PRC) needs a currency with international status which is able to match its economic status in the global economy. The recent developments regarding the China Foreign Exchange Trade System moving into London and New York suggests the Yuan may make significant progress in internationalisation. By internationalising a currency, this may be used for private purposes or public purposes by residents of China and non-residents. The paper also highlights the benefits of Yuan internationalisation for the Republic of China, such as the reduction in exchange rate risks. The internationalisation of the Yuan means more foreign trade and financial transactions are invoiced and settled in Yuan. An additional benefit is the reduction in China’s transaction costs in trade, including the cost of trade finance.
The British government continues to work towards building a strong, effective relationship with China, with the aim of promoting international security, increased mutual prosperity and support of China’s process of modernisation and reform. Recent news from the government website highlights London’s status as the leading western RMB hub and a leading global financial centre. This may contribute to the decision for the CFETS to expand into London from Shanghai. A recent Chinese sovereign RMB bond worth £300 million was issued in London and is the first Chinese sovereign RMB bond to be issued outside of China. This may reinforce the United Kingdom’s ever-strengthening economic and financial relationship with China. Furthermore, the United Kingdom has accounted for over 60 percent of all RMB trade activity outside of China. It appears China may be making strides towards regaining its position as the world’s largest economy and recent developments suggest the United Kingdom sits at the heart of these developments.
How might China strengthen its economic relationship with Britain?