Why is Britain issuing debt denominated in renminbi?

Chinese currency Image copyright AFP

Britain is in the process of issuing a government bond denominated in the Chinese renminbi (RMB), making it the first country (aside from China, of course) in the world to do so.

It's not unheard of to issue sovereign debt in a foreign currency, but what makes it somewhat unusual is that the RMB isn't freely tradable or convertible despite being the currency of the world's second largest economy. However, that's changing as the offshore market for RMB develops and the currency has already quickly jumped into the top 10 of the most used currencies in the world.

Britain will use the proceeds to finance its reserves, which currently consists of only US dollars, euros, yen and Canadian dollars, according to HM Treasury. The UK isn't the first country to hold RMB in its reserves, as central banks largely in emerging markets have also begun to do so.

It is an important step on the path toward the rise of the RMB as an internationally used currency.

As such, for London to maintain its position as the dominant market for foreign exchange trading, being in pole position as an offshore RMB hub will matter if the Chinese currency continues to gain in importance.

But, there's competition. And not just from Hong Kong, which is part of China. Soon after the announcement of a Chinese clearing bank for London, Frankfurt and Luxembourg got them as well.

And that's why Britain is issuing debt not in its own currency, but the RMB. The gesture seeks to cement Britain's ambition to be the Western hub for the RMB. Now let's see how the competition responds.

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