The People’s Bank of China (PBOC) announced today that they will begin to offer direct trading of the renminbi (RMB) and British Pound (GBP) on the interbank FX market. The GBP becomes the fifth currency to trade directly with the RMB, being added to the US, Australian and New Zealand dollar and Japanese yen. Helping facilitate the trading, the PBOC has authorized the China Construction Bank (London) Limited as the clearing bank in London. The news comes after the PBOC and Bank of England signed a Memorandum of Understanding regarding clearing and settlement agreements this past March.
According to the PBOC, they believe the direct trading of the currencies will promote bilateral trade of goods and services between China and the UK, as it will lower costs associated with economic trade. Until now, trade between the two countries involved an extra conversion cost of exchanging the GBP into one of the other four available currencies before being able to receive RMB. While currently only accessible on the interbank FX market for retail brokers, the existence of the direct trade is expected to provide an additional reference point for pricing RMB/GBP Forex pairs in the future, as volumes and the market for this product develop.
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Looking farther out, the expansion to include GBP trading could have longer-term effects on the price of the yuan. Not providing much volatility due to its value being pegged to a basket of currencies, the US has been applying pressure on China to allow the yuan to freely trade on the FX market. However, as the largest foreign holder of US debt, China could suffer if its currency appreciates against the dollar. By strengthening its financial ties with other major economies like the UK, it reduces the country’s exposure to any single currency, which could allow China additional room to ease curbing of the yuan’s value.