The interbank London FX market has just opened to eight Chinese banks as the R5-SHCH Connect went live. The service is part of the Belt and Road financial infrastructure connectivity initiative that has been pushed by the UK and Chinese governments.
The official launch of the line was heralded during the three-day visit to China of UK Prime Minister Theresa May. The delegation of British businesses that joined the May during her visit included representatives from R5 alongside major UK financial institutions HSBC, LSE, BP, Standard Chartered and Standard Life Aberdeen.
Domestic banks in China have been more or less insulated from the leading centre for FX trading. The London-Shaghai R5-SHCH Connect enables them to enjoy a seamless access at a time when the UK is looking for closer ties with countries outside of the European Union.
The partnership between London’s R5 and the Shanghai Clearing House was announced by UK Chancellor Philip Hammond in December as part of the 9th UK China Economic Dialogue.
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Commenting on the event, the CEO of R5, Jon Vollemaere, commented, “The R5-SHCH Connect is a shining example of what can be achieved when the UK and China work in cooperation, driving innovation and capturing opportunities that emerge as the financial markets evolve.”
FX Liquidity, Volumes and RMB Trading
The access of major Chinese banks to the market could further boost the liquidity on the market and trading activity across the globe. It also cements the importance of London as a global FX centre at a crucial time when Brexit worries are rippling across the City’s financial industry.
Increased convertibility of the Chinese yuan is also on the cards, as the Chinese government is slowly aiming to dissipate international pressure on its FX policy. The internationalisation effort of the renminbi is a stepping stone for the second largest economy in the world to reduce its dependence on holding a massive amount of US treasuries.
Mr. Vollemaere contonued: “The new service offers benefits for all institutions trading FX. It provides Chinese banks with increased access to the global FX market, it enhances liquidity in major currencies, and it advances the internationalisation of the RMB.”
“Since this initiative was announced at the end of last year we have seen great interest from China’s banks, as well as institutions already trading in the London market. These institutions will benefit from additional counterparties and deeper liquidity, provided by new Chinese entrants,” he concluded.
The first phase of the R5-SHCH Connect has gone live with eight Chinese banks connecting to the London FX market. Many more onshore Chinese banks will be added throughout 2018.