New RMB London Bank A Boon For China ETFs

June 19, 2014


Exchange traded funds investing in Chinese equities are set to benefit from a new bank in London, approved yesterday, that could potentially allow investors to trade directly and encourage more ETFs to launch.

The People’s Bank of China has paired up with the Bank of England (BoE) to create the China Construction Bank, which settles and clears trades in renminbi (RMB), and will play a big part to enforce London’s reputation as the largest RMB trader outside of China. It will also support “the longer-term rebalancing of the world economy”, according to a note on the BoE’s website.

Mark Carney, Governor of the BoE, said the announcement represents another important milestone on the progress towards greater cross-border use of the RMB.

“As the official clearing bank, China Construction Bank will play a valuable role in facilitating greater use of the RMB for trade, investment and other economic activities in the UK, particularly by providing a further option for UK firms to clear and settle their RMB activity within the London market,” he said. “The Bank is committed to further supporting the cross-border use of the RMB in a manner that is consistent with our domestic responsibilities.”

The London Stock Exchange introduced Asian currencies – the Hong Kong Dollar and renminbi – for ETFs as of April 2014, but only if the ETF is in the “Euroclear Bank International structure”. The China Constructive Bank is closer to a one stop shop for ETF RMB trading.

“To be able to offer a full Renminbi trading package, from products and listing through to clearing and settlement, represents an important step forward for London as a centre for international finance,” said Lida Eslami, product specialist, exchange traded funds at the London Stock Exchange. “It reinforces London’s position as a leading offshore RMB hub, giving European ETF investors exposure to one of the fastest growing economies in the world. I am sure this will encourage more ETF issuers to launch China-linked products.”

Three ETFs have been launched in London this year that physically track mainland China “A shares”, which are equities listed on Shanghai and Shenzhen exchanges and are subject to foreign ownership restrictions.

They are the first ETFs in Europe to directly access this market but are only available in US dollars and British sterling.

This move is part of the path to allowing investors to trade directly in RMB by helping to open cross border transactions.

Michael John Lytle, chief development officer at Source, said the new bank and trading facility is a building block on the path for RMB becoming a fully convertible currency.

“It allows investors to have the option to trade the ETF not only in dollars and sterling and doing a spot FX transaction into RMB, but also to invest directly in RMB,” he said. “Of course for that you would need a RMB bank account, and as it’s a controlled currency you can’t open one at the moment, so further building blocks are needed.”

Martin Arnold, senior research analyst at ETF Securities, agreed that the move was part of a wider trend of opening up the market and would likely be “positive” for ETFs that can access Chinese investment markets.

“Not only does the move support the UK’s economic outlook by encouraging stronger bilateral ties with one of the fastest and largest economies in the world, but it also helps support China’s economic transition by improving market accessibility,” he said.




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