BoE ‘ready in principle’ to set-up Yuan swap line
UK central bank could be first in G7 to ink forex swap agreement with China
By Gaurav Sharma | CFO UK | Published 18:00, 24 January 13
The Bank of England (BoE) is 'ready in principle' to become the first central bank in the G7 to enter into a foreign exchange swap agreement with China's central bank, Chris Salmon, BoE's executive director for banking services said on Thursday.
Addressing the London Money Market Association's executive committee meeting, Salmon said, "The BoE would welcome the development of the offshore Yuan market just as it would any other legitimate market innovation, and we would not want to inhibit that outcome inadvertently through gaps in our operational framework."
"To remove any residual uncertainty about our attitude: the BoE is ready in principle to agree a swap line with the People's Bank of China (PBOC), assuming a mutually agreeable format can be identified," he added.
Previously UK officials have always maintained that they would not enter into such a deal with China’s central bank as the Yuan was not freely exchangeable.
For its part, China has signed bilateral currency swap deals in the past. However, a tie-up with the Bank of England, if approved, would be a first between the burgeoning Asian economic powerhouse and a G7 central bank.
London launched an offshore Yuan currency and bond market last year. If this were to be followed by a swap deal, the agreement would cement the City’s status as the leading centre for offshore trade in the Chinese currency in Europe.
However, Salmon said the growth of the market will ultimately depend on the success of market participants in matching embryonic demand and supply for Yuan denominated products.
"It’s just as the original Eurodollar market grew by satisfying a latent private sector demand for dollar assets in this time zone. That said there is a perception that market confidence would be boosted if the BoE and the PBOC agreed a swap line," he concluded.
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