George Osborne has announced that the UK is to be the first Western, or non-China, state to issue a renminbi bond. This is part and parcel of his design to make the City of London the pre-eminent offshore trading center for the currency as the restrictions on non-domestic use are gradually weakened. The bond won't be all that large in the scheme of such things, around 2 Billion RMB is the general consensus. It's also tiny as compared to the government's overall borrowing of near £130 billion a year at present. However, it will help to develop the market:
The UK will become the first western country to issue a government bond denominated in Chinese currency, in a move touted by Britain’s Treasury as a sign of the two countries’ deepening ties.
The renminbi bond will be used to add to Britain’s foreign currency reserves, which hitherto did not contain Chinese currency, said George Osborne, the chancellor, at a press conference following meetings with Ma Kai, China’s vice-premier.
This follows on from the launch of the first "sukuk" (ie, conforming to Islamic principles on no interest but payments from profit participation instead) bond back in the summer.
The basic thought here is that in order to construct a viable bond market you want to have some sovereign issues in that currency or of that structure to act as the risk free benchmark for other issuers. It would be entirely possible for a corporate to issue renminbi bonds in London. It's just that no one would really have any idea how to price it: there would be no comparators. Thus such borrowing would be very expensive: uncertainty over price in financial markets tends to make the price rather high.
So issue sovereign bonds and that issue or issues can act as that pricing benchmark. If, say,
The other question is, well, what on earth is the British Government going to do with 2 billion RMB? They've said that it will be added to the country's foreign exchange reserves. In much the same way that previous borrowings in dollars have been (as an aside I worked, in a very minor manner, on the first UK sovereign borrowing in dollars. Nothing fancy in my role, I was the accounting clerk adding up the expenses as a student intern). For large amounts of such foreign currency, say for a currency intervention to stabilise the FX rate or something, central banks can and do make arrangements to swap large amounts of their respective currencies. But it's always nice to have smaller amounts immediately to hand.
This isn't, this renminbi deal, a huge development as far as the financial markets are concerned. Once launched the bond is likely to do not very much and to sit in quiet corners of investment accounts for years on end. The import of the story is really the intent that it shows: that London aims to become, and the government intends to aid it to become, the major offshore centre for the trading of renminbi and for the offshore issuance of bonds in that currency. Just as it was and remains for the issuance of offshore dollar bonds and the Eurobond market as a whole (which is now slightly misnamed as it's not limited to Europe at all).
