London to be next offshore centre for China’s yuan after HK

China will give London-based investors the right to buy up to 80 billion yuan (€9.7 billion) worth of mainland stocks, bonds and money market instruments, making it the next offshore yuan trading centre after Hong Kong.

The agreement, announced by Britain and China in a joint statement on Tuesday, falls under the Renminbi Qualified Foreign Institutional Investor plan, or the RQFII.

This is the first time the RQFII has expanded outside Hong Kong to give investors more avenues to invest yuan and more incentives to hold the currency - an outcome desired by China which wants to turn the renminbi into a widely-traded currency some day.

In return for the RQFII, the British government has agreed to start talks to allow Chinese banks to set up wholesale units in the United Kingdom, the two governments said.

“The renminbi will now have a firmer footprint in the European market,” ANZ analysts said in a note.

“With the increasing presence of Chinese banks in London, the granting of the RQFII license will strengthen and widen the platform for London to develop the offshore RMB (renminbi) bond market.”

Under the agreement, London and Beijing will also allow for the yuan to be traded against sterling directly, as opposed to going through the dollar, thereby markedly reducing transaction costs.

A handful of countries including Singapore, Frankfurt, Taiwan and Kenya are vying for Beijing's approval to be a designated centre for clearing yuan trades outside of China in the hope of offering what may be a lucrative financial service. But Chinese analysts have said London is a natural choice given it is as a major centre for global currency trades.

Started in 2011 as a way of enticing investors to hold the yuan, the RQFII now has a global quota of 350 billion yuan, of which 134 billion yuan is utilised.

"Today we agreed the next big step in making London a major global centre for trading and now investing the Chinese currency," said UK chancellor George Osborne, who is in Beijing.

Today’s agreement comes after Britain and China agreed to set up a currency swap line of up to 200 billion yuan in July in a move aimed at boosting trade and financial stability.

China last week also signed a 300 billion yuan swap agreement with the European Central Bank in the second-largest of such deals to date.

Reuters