China into Europe: the Latest Currency Deal

After announcing a prospective deal in February, Sir Mervyn King has completed his stint as governor of the Bank of England by signing a currency-swap agreement with the People’s Republic of China. It is the latest of around 20 similar deals that the People’s Bank of China had finalised in recent times, spreading the influence of the renminbi around the world economy. There are of course distinct advantages to the British economy of holding a large stock of yuan; however, analysts are discussing the move by the Chinese as a continuation of the attempt to challenge the US Dollar as the global base currency, and to increase the presence of the renminbi beyond those geo-politically adjacent economies, such as Hong Kong and Taiwan, and China’s largest trading partners, such as Brazil. This blog published on the currency swap deal with Brazil on April 10th 2013: http://wp.me/p3g0mz-1a

Mervyn’s Final Signature

The deal signed with the Chinese lies in the region of around £21bn – USD32.6bn or RMB200bn – roughly equal to the size of similar deals that the PRC holds with Australia and Brazil, but around half the size of the agreement with Hong Kong. The ex-British overseas territory, granted political autonomy in 1997, is currently the largest international centre for trade of the yuan. King hopes that the Anglo-Chinese deal will move this currency trade focus to London, and build on already increasing renminbi activity in the British capital. The outgoing governor, due to be replaced by Canadian banker Mark Carney in early July, is attempting to leave a legacy of returned international interest to London as a financial centre, not just in connection to the yuan, but as a global currency trading centre.

Separately, by holding each other’s currency, both the British and the Chinese economies hold effective insurance against sudden trade deficits or holes in trade profits. The deal will neutralise any interconnected financial crisis between the two economies – something that King does not believe is likely. Due to this insurance already being in place, it therefore is probable that trade between Britain and China will increase over the coming years. While the deal is only in place for 3 years, the option is there to extend in 2016, and increase the value of the agreement. Such a deal is good news for the British economy, whose trade deficit is still appalling despite being cut by the coalition government. However, Chancellor George Osborne and incoming governor Carney must be careful to avoid dependency on other economies and continue to foster British growth from the grassroots level in industry.

A Sino-Centric Deal?

As argued in the article on the Sino-Brazilian currency swap deal, China’s motivation for signing a large array of agreements is somewhat suspicious. Yes, Beijing would benefit from trade insurance in what is a rocky global economy, especially with its big trade partners. But Britain is not high on such a list, and hence, as potentially with the Brazilian agreement, London is set to gain more in the short term than Beijing from the deal. What is more likely to be on the Chinese agenda is the mounting of the potential challenge to the American Dollar as the global base trading currency. By increasing the presence and influence of the renminbi in significant and expanding economies across the globe, the Chinese are setting up for a financial takeover of the world economy. This latest deal with Britain is the first of its kind in Europe, and is certainly a logical step in the direction of promoting the yuan to truly global trade, even if financial centres like London benefit in the meantime.

Conclusion

Now that that Chinese have secured a deal in Western Europe, analysts must look towards other similar economies to see if more deals with the yuan come to light. It will also be interesting to observe the renewals, or non-renewals, of such deals in the near future. In Britain’s case, if London continues to see a rise in renminbi trading activities, and some increase trade with East Asia, then there is no reason why Carney would reject an extension of King’s agreement in 2016. For China, this deal may be the launch of the penetration of the Western economic hegemon that has dominated the world system since its inception.

Bibliography

Josh Noble, ‘UK and China in Currency Deal as renminbi’s global influence rises’. Financial Times, June 24 2013

BBC News, ‘UK and China in £21bn currency swap deal’. June 23 2013 (available at http://www.bbc.co.uk/news/business-23020718

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