London debt issue represents milestone for China

By Wang Yuzhu Source:Global Times Published: 2015-10-22 23:53:01

Issuance highlights China’s economic power in post-financial crisis era

Illustration: Peter C. Espina/GT

According to the People's Bank of China (PBC), the central bank, China issued 5 billion yuan ($788 million) worth of one-year bills in London on Tuesday, the first time that China has issued yuan-denominated bills outside the country.

As reported by the Financial Times, China's Ministry of Finance is likely to offer yuan-denominated debt with longer terms. This shows that economic cooperation between China and the UK has been elevated to a new level.

In recent years, Sino-British trade has grown by leaps and bounds, and investment and financial cooperation have been increasing. The opening up of sensitive UK sectors like telecommunications and nuclear energy to Chinese investors shows that the British government strongly trusts China's investment enterprises.

With trade settlement in the yuan having continued to rise, the stock of offshore yuan has also increased. However, the offshore market has long lacked an effective repatriation channel for the yuan. That affects the willingness of many in the international community to hold the currency, and so offshore yuan exchange rates and interest rates are under pressure.

This situation could lead to speculation in the yuan and have a negative influence on the currency's internationalization and the stability of the international financial market. Apart from the quota for Renminbi Qualified Foreign Institutional Investors (RQFII), the PBC's move to issue yuan-denominated bills in London - an important offshore yuan center in Europe and a pivotal international financial center - is another innovation for the yuan to return to China's domestic market. This means that in the future, offshore yuan capital, including that from other markets, can flow back to China via the London financial market. That will further highlight London's international competitive advantage as a financial center.

Since World War II, the supremacy of the US dollar, the formation of the eurozone and a rising euro have weakened London's position as a financial center. So the issuance of yuan-denominated bills during President Xi's State visit to the UK is in fact a demonstration of China's desire for Sino-British cooperation.

Technically speaking, it should not be much of an issue to launch yuan-denominated debt in the London market. The concern is mainly on the political level. Western countries have their concerns over China's potential political intentions and ambitions in terms of its investment and the yuan's internationalization, but London has shown them that China is a reliable partner.

The issuance of bills in yuan in London during Xi's visit also conveys an implication that political suspicion between China and the UK no longer exists, and shows that both sides welcome investment and opening-up. One example is that, despite US objections, the UK joined the Chinese-led Asian Infrastructure Investment Bank (AIIB), which led to many other developed countries' involvement in the AIIB. Another example was London's openness to the China Investment Corporation (CIC) not long after the corporation was founded in 2007, despite skeptical attitudes among some Western countries.

Financial cooperation between China and the UK could take bigger steps and further expand the repatriation channels for the yuan to China from different fields. For example, on September 25, the China Foreign Exchange Trade System and Chicago Mercantile Exchange Group (known as CME Group Inc) jointly announced an agreement allowing US financial institutions to invest in China's interbank market, which can also be applied in London's financial market. Issues by the PBC of yuan-denominated bills and bonds will be more effective in managing the liquidity of the domestic money market, compared with the opening up of the interbank market.

Against the backdrop of yuan internationalization, the PBC's perspectives and measures in monetary policy will undergo a series of adjustments, and London as a financial center could be an all-encompassing partner in the process of the yuan's internationalization. In addition, China's move to offer yuan-denominated debt also serves as a signal to attract more Chinese enterprises to conduct investment and financing business via the London market.

The issuance of yuan-denominated debt by the PBC in London is more than a milestone for the currency's internationalization. It is also a recognition of China's influence in the spheres of economics and finance and a reflection of the developing trend of pragmatic cooperation between China and developed countries.

The UK's cooperative approach toward China reflects the reality that developed countries are rebalancing and normalizing their view of a rising China. Sino-British cooperation is also a reflection of China's new style of international relations under Xi's leadership.

In the post-financial crisis era, when the global economic recovery and sustainable growth face severe challenges, pragmatic cooperation between China and the UK is the appropriate development direction for globalization. The fruit of this cooperation will serve as an example of global cooperation in the post-crisis era.

The author is a research fellow with the Institute of World Economy, Shanghai Institutes for International Studies.

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