London is likely to remain a complementary rather than central player in the emerging renminbi (RMB) market, according to a new paper.

The Connecting Dots of China’s RMB Strategy: London and Hong Kong, says that although financial centres such as London and Singapore are essential to China’s strategy of internationalizing its currency, the expansion of the offshore RMB market remains contingent upon politics in Beijing around capital account liberalization. As a result, for the time being London will struggle to expand the RMB business as quickly as Hong Kong, which benefits from being part of China.

The paper, by Paola Subacchi and Helena Huang, explores a series of policy measures introduced by Beijing since 2009 to facilitate the expansion of the nascent offshore RMB market. As China seeks to overcome the constraints of the currency's limited convertibility, there will be significant implications for the international monetary system and for economies across the world.

In examining the role being played by various international financial centres, the authors draw a distinction between ‘offshore centres’ and ‘offshore hubs’. They argue that, limited by technical difficulties and policy barriers, offshore hubs such as London connect to the onshore market via the offshore centre, namely Hong Kong.

The extent to which London and other hubs can develop depends on strategic decisions made in Beijing, and on the liquidity made available through and by Hong Kong. London is therefore a crucial 'connecting dot' in China's strategy but, given the unique features of the offshore RMB market at present, Hong Kong has a competitive advantage.

The authors also ask whether London's financial sector, which has been developed on the back of private initiative and market preferences, will eventually be at odds with China's policy-led RMB strategy.

Notes to Editors

Read The Connecting Dots of China’s RMB Strategy: London and Hong Kong by Paola Subacchi and Helena Huang.

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