REYKJAVIK – European and Chinese officials have made two notable announcements in recent weeks. On June 18, China’s second largest financial institution, China Construction Bank, was designated as the official renminbi clearing bank for London. The next day, the Frankfurt branch of the Bank of China, the country’s largest commercial bank, received the same designation for the eurozone.
Both announcements were greeted with great acclaim. British Chancellor George Osborne hailed the creation of a London clearing bank as “hugely important” for the financial future of the City. Joachim Nagel of the German Bundesbank lauded the Bank of China announcement as a “milestone on the road toward creating a renminbi trading center in Frankfurt.”
We should expect these kinds of enthusiastic pronouncements from European officials, who are desperate for good news, whatever its source. But should the rest of us care? After all, banks, firms, and even individuals already can buy renminbi for their pounds and euros. A range of financial institutions, both locally and in Hong Kong, have long stood ready to provide this service.
The only difference is that the two big Chinese banks, when doing business in London and Frankfurt, will be permitted to purchase renminbi in China itself when their foreign customers demand it. The People’s Bank of China (PBOC) will give them a quota for this purpose. Other banks, when seeking to provide renminbi to their clients, are limited to bidding for the fixed supplies that circulate offshore. This raises their costs and limits demand for their services.