The Significance of Direct Trading Between RMB and GBP
On June 18, 2014, during the visit to UK, Premier Li Keqiang announced the establishment of RMB business clearing bank at London, realizing the direct trading between RMB and GBP. At the same day, as authorized by PBOC (People’s Back of China), China Foreign Exchange Trade Center announced that direct trading between RMB and GBP will start in interbank foreign exchange market from June 19, 2015. On the morning of June 19, China Foreign Exchange Trade Center officially launched the direct trading between RMB and GBP in inter-bank foreign exchange market; Bank of China successfully completed the first direct trading of RMB and GBP with SCB (China). PBOC acclaimed that this move is “an important measure to push forward the mutual trade ties between China and UK”. Its significance is described as below.
First, PBOC expressed that the direct trading between RMB and GBP brings multiple benefits. It is beneficial to form the direct exchange rate between RMB and GBP; can reduce the exchange cost of economic entities; promote the use of RMB and GBP in mutual trade and investment; strengthen cooperation and support the continuous development of economic and financial tie between China and UK.
Second, as the second largest economic entity and the largest trading country in the world, China’s global economic position is increasingly important and unreplaceable. Statistics shows that in 2013 China’s GDP volume is 8.3 trillion US dollars, an increase of 7.8% over the last year, accounting for 12% of the global volume. In 2013, China’s total trade volume exceeded 4 trillion US dollars for the first time and its foreign trade volume accounts for 11% of the global volume, ranking at number one in the world. China provides about 30% contribution to the global growth. Over the recent years, China has been actively pushing forward the internal and external opening-up of financial industry to adapt to the changing environment; taking measures to continuously improve RMB exchange rate marketization formation mechanism to accelerate exchange rate marketization. Though there is still long way to go for free RMB exchange, the direct trading between RMB and GBP indicates that the process of RMB internationalization has made another large step forward.
Third, currently, RMB can trade with Japanese Yen, Australian dollar, New Zealand dollar and US dollar directly. European Union is the largest trading entity for China. UK used US dollars for settlement before. As the exchange rate of RMB against US dollars fluctuated largely, China’s foreign trade was also affected to some extent. The direct trading between RMB and GBP means that the third-party currency (US dollar) will not be relied on for settlement. Previously, in case of exchange of RMB and GBP, people have to exchange RMB to USD first, and then exchange USD to GBP. This measure aims at promoting the cross-border use of RMB in trade and investment settlement, accelerating the process of RMB internationalization to meet the market demand both at home and abroad. It reflects the pragmatic approach of China’s decision maker on RMB internationalization and reflects the strategy based on domestic economic development, complex international economic and financial environment and market demand.
Forth, the direct trading between RMB and GBP is a recognition by UK and international market for the position of RMB, and also a recognition by the world for China’s economic prospect, financial system stability and capability against risk. It strengthened the confidence on China’s future and pushed forward the bilateral economic and trade ties. For the ordinary people and enterprises, the direct trading can narrow the dealing price differences and reduce cost, making the exchange much easier. For bank, it can reduce trading volume and formalities, save trading time and cost, and improve operation efficiency.
Forth, the direct trading between RMB and GBP is a recognition by UK and international market for the position of RMB, and also a recognition by the world for China’s economic prospect, financial system stability and capability against risk. It strengthened the confidence on China’s future and pushed forward the bilateral economic and trade ties. For the ordinary people and enterprises, the direct trading can narrow the dealing price differences and reduce cost, making the exchange much easier. For bank, it can reduce trading volume and formalities, save trading time and cost, and improve operation efficiency.
As China’s economy rises in the world, the RMB circulation scope at abroad continue to expand, and RMB internationalization process is also accelerating. Currency competition is the highest form of economic completion currently among countries. Nowadays, the substitution of RMB for other currencies has been strengthened, and the currency distribution and related seigniorages benefit of countries around the world are changed to some extent, which is bound to produce profound influence on western countries’ regional political pattern. European Central Bank Executive Board member Yves Mersch said “as China’s economic development scale and its role in global trade is quite influential and due to the importance of finance, RMB may eventually challenge USD and become the world currency.”
