China’s Yuan Pushes Deeper Into Global Financial System
The latest step: the London Metal Exchange, the world’s largest venue for trading metals where $15 trillion of metals was traded last year, is set to accept yuan as collateral for banks and brokers that trade on its platform. The Chinese currency joins the U.S. dollar, the euro, the British pound and Japan’s yen, which are all currently permissible as collateral on the LME’s platform.
“In the commodities area, it makes absolute sense to start providing renminbi-denominated services,” said Trevor Spanner, chief executive of the LME’s clearing house business. “The renminbi is on its way to becoming one of the world’s most widely used currencies” he said.
While largely a technical change, the LME move marks another milestone for China’s currency.
The yuan is now the fifth most used currency for international payments, ranking number seven a year ago, according to data from the Society for Worldwide Interbank Financial Telecommunication, a provider of payments services.
A Bank of England survey on Monday showed that trading in yuan rose 25% in London in the six months to April this year, even as trading volumes in other currencies fell by 8% on average over the same period.
Meanwhile, China, whose economy is a major driver of demand for a range of commodities, is also taking a greater role in metals markets specifically.
Last year, Hong Kong Exchanges and Clearing Limited, which owns the LME, launched yuan-denominated futures contracts for some industrial metals, while the LME signed agreements with two Chinese companies to explore ways of expanding use of the yuan.
In June this year, the London Bullion Market Association said that Bank of China Ltd. will become the first Chinese bank to participate in the daily process for setting the price of gold. China vies with India as the world’s largest consumer of gold, according to the World Gold Council.
The yuan’s gains in the global financial system come as investors turn cautious on China’s domestic markets, where stocks have been on a volatile ride of late. And international use of China’s currency remains tiny compared with the dollar, the euro and sterling.
David Clark, chairman of the U.K.-based Wholesale Markets Brokers Association, said global renminbi trading infrastructure is falling into place, but volumes will only really take off when China’s currency can be freely converted into dollars, euros or other foreign currencies.
“The renminbi is getting more and more important for global finance. But there is a big question mark: when it will be fully convertible?” he said.
Still, a number of major financial centers are racing to become a hub for the yuan, including London.
“The role of the renminbi in foreign exchange trading and cross-border payments has surged,” said Dan Marcus, CEO of London-based currency trading platform ParFX. The rise of China’s currency on global markets “is arguably the most significant development in currency trading since the introduction of the euro in 1999. Ten years from now, it will be challenging the top major currencies.”
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