Renminbi's global appeal grows as UK eyes sovereign first

* Renminbi liquidity set for lift as more overseas hubs emerge

* UK issue to boost market in Europe

By Nethelie Wong

HONG KONG, Sept 19 (IFR) - The United Kingdom is set to become the first foreign country to issue an offshore renminbi bond in a symbolic move that points to the currency's growing global appeal.

In a statement made on September 12 by the Chancellor of the Exchequer George Osborne, the UK government said it intended to be the first national government outside of China to issue a bond in China's currency.

The announcement comes amid growing rivalry between European cities for a role in the growing offshore market for the Chinese currency.

"Britain has really upped its game in the renminbi market with this symbolic issue which will set the scene for renminbi activity to further accelerate in Europe and open the floodgates for more Dim Sum issuance as well as the establishment of other renminbi products," said Jinny Yan, director, renminbi solutions at Standard Chartered Bank.

Osborne said the renminbi deal would be similar in size to a Rmb2bn (US$325m) bond that China Development Bank issued in London. That London-listed CDB issue was the first from a quasi-sovereign outside of Greater China (HKSE: 0431.HK - news) .

China has appointed four renminbi-clearing banks in Europe this year. China Construction Bank serves London, Bank of China (HKSE: 3988-OL.HK - news) serves Paris and Luxembourg, and ICBC (HKSE: 1398-OL.HK - news) serves Frankfurt.

The continent accounts for only a small portion of the renminbi market, but its share is growing quickly.

In August, Europe represented 10% of renminbi payments worldwide by value. The UK led Europe, with growth of 123.6% between July 2013 and July 2014. France is next (growth of 43.5%), then Germany (116%) and Luxembourg (41.9%), according to Swift's renminbi tracker.

"The fact that renminbi payments between Europe and Greater China have more than doubled in a year is extremely encouraging news for European businesses and governments," said Vina Cheung, global head of RMB internationalisation, payments and cash management, HSBC.

"It shows businesses are seizing the opportunity presented by China's currency liberalisation programme to deepen their commercial relationships in the world's second largest economy. It also shows government efforts to build hubs for renminbi trading and investments in Europe are starting to bear fruit."

AHEAD OF THE PACK

London hosts the largest renminbi foreign exchange trading in the world. Trading averaged US$25.3bn per day in 2013, a 50% increase from 2012.

London already accounts for 60% of European renminbi activities overall, second only to Hong Kong among offshore markets, according to StanChart (HKSE: 2888-OL.HK - news) .

"If Britain does not take the lead to do a sovereign Dim Sum bond, it wouldn't be long before another country took the crown," said Yan.

It is important for Britain to issue sovereign Dim Sum bonds to set a benchmark not only for British issuers, but more importantly, for other western countries. A UK Dim Sum would also increase the renminbi's status above other currencies from Asia and developing countries, and signal its importance as a global currency.

"With a strategic issuance by the UK, the renminbi is one step further forward in becoming a truly internationalised currency," said Yan.

As renminbi liquidity pools deepen, offshore centres are vying to provide renminbi account holders with easily accessible investment tools, which, in turn, will encourage more deposits in the currency.

"Issuing locally listed Dim Sum bonds is one quick and easy way to raise the profile of an offshore renminbi centre," said a Hong Kong based banker.

That explains why London, Singapore, Taiwan, Frankfurt and even Luxembourg are racing to boost locally listed offshore renminbi bond issues.

In the past week, London boasted two London Stock Exchange-listed Dim Sums totalling Rmb3bn from CDB and IFC, while ICBC Singapore printed a Rmb4bn Singapore-Taiwan dual-listed issue. Bank of China's Paris branch issued Rmb2bn of Dim Sum listed in Paris and Frankfurt in July.

The sovereign bond is expected to be issued before the end of the year and will be used to finance the UK Government's foreign currency reserves.

"The Bank of England invites those banks that have been part of a syndicate for multiple offshore renminbi bond issuances listed on a market in the European Union and Switzerland in the 12 full calendar months prior to this announcement to bid to act as a member of the syndicate," the HM Treasury said in a statement.

GLOBAL AMBITIONS

China has clearly spelt out its target of making the renminbi a reserve currency for governments around the world and, eventually, to gain the status of special drawing rights from the IMF.

In fact, the UK sovereign bond will not only put renminbi into the UK's reserves, but also provide a chance for other central banks and sovereign entities to add the Chinese currency to their holdings.

StanChart noted that roughly 50 central banks around the world have some sort of renminbi assets in their reserves.

The Chinese government's Dim Sum offerings, Cagamas' Dim Sum sukuk and IFC's London offerings all illustrate the appetite for such assets from official sector entities.

IFC sold 28% of its Rmb1bn London-listed Global to central banks and official institutions, while Cagamas' sukuk filled the appetite of some sovereign investors from the Middle East. (Reporting by Nethelie Wong, Editing by Steve Garton, Julian Baker)