China to Set Yuan Clearing Banks in Luxembourg, Paris

In its continued push to make the yuan a global currency, China’s central bank said Sunday it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centers battle with London to become the leading European offshore yuan-trading city.

The People’s Bank of China announced the move in two separate statements Sunday. It didn’t say when it would designate the clearing banks.

The French and Luxembourg central banks said Sunday they had signed agreements with PBOC allowing for greater cooperation in the oversight of their domestic yuan market.

The weekend moves are the latest salvos in the race to win a major share of business in cross-border transactions in the Chinese currency. Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China’s fast-growing economy.

Opening a clearing bank is a critical step in developing an offshore yuan-based business. The designated banks will be able to supply yuan liquidity in case of a shortage by directly accessing China’s onshore currency market.

French authorities have openly pushed for Paris to become a center for yuan transactions.

In March, China also granted 80 billion yuan ($12.9 billion) of quotas to French financial institutions that enable direct investment in the Chinese domestic financial market.

The Bank of France said Sunday the latest decisions by the PBOC “confirm the prominent role of the French market place” in cross-border use of the currency.

Luxembourg, home to a powerful asset-management industry, has built strong ties with Chinese investors in recent years and currently hosts the European headquarters of China’s three leading banks.

For China, the move to allow the yuan to be used more freely abroad aims to boost demand for the currency and reduce the amount of dollars entering the country. China still maintains a tight grip on the yuan’s value, with its trading strictly controlled in the mainland market.

For the long term, China wants to turn the yuan into a global reserve currency that is used for investment, trade and loans, as are the dollar and euro. A widely accepted yuan could help Chinese companies alleviate foreign-exchange risks.

In addition to designating a clearing back in London earlier this month, the PBOC also announced on June 18 that the yuan can now be exchanged directly for British pounds in Shanghai’s foreign-exchange market. Previously, traders have had to exchange the currencies through the U.S. dollar, which added to transaction costs.

China’s currency has become increasingly popular in settling total trade. In the first three months, 18% of China’s total trade, or 1.09 trillion yuan, was paid for in yuan, up from 14% in the fourth quarter of last year, according to Bank of China. That compares with just 1% of China’s total cross-border trade five years ago.

Full article: China to Set Yuan Clearing Banks in Luxembourg, Paris (NASDAQ)

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