Following the establishment by the Bank of England of a three-year 200 billion yuan currency swap line in June 2013, the UK and China have now announced that the pound is to become the fourth currency to trade directly against the yuan after the US dollar, the yen and the Australian dollar.

China also approved an 80 billion yuan quota for London-based investors to buy onshore Chinese securities under the Renminbi Qualified Foreign Institutional Investor Scheme, making the UK one of three countries, along with Hong Kong and Taiwan, to take part in this scheme.

Simultaneously, the UK agreed to allow Chinese banks to set up branches for wholesale banking in London, thus eliminating the current requirement for banks to operate in the city through subsidiaries subject to capital requirements. Critics of this move have pointed to the relatively recent experiences the UK had with Icelandic banks establishing branches – when things started to go wrong, the regulators had no clear line of authority or oversight to act. This offer to Chinese banks is a significant change of heart from the UK. It clearly appears to be a trade-off as missing out on the arrival of China to the international financial markets would be a strategic mistake. We would expect the government and regulators of the UK to seek significant assurance that Chinese banks operating on this more flexible basis are transparent and that the lessons learned from the Icelandic fall-out can be put into practice betweeen the banks and the UK and Chinese governments and regulators.

The arrangement makes London the first European city to become a trading hub for the Chinese currency. The yuan has become the ninth most traded currency in the world, according to the Triennal Central Bank Survey of the Bank for International Settlements published in September 2013. The objective is for the UK to benefit from China’s readiness to open its financial sector and gain greater prominence in the worldwide financial system by fortifying London’s position as a global financial centre.en the banks and the UK and Chinese governments and regulators.