By Michelle Chen and Michelle Price
HONG KONG (Reuters) - London's role as a major offshore yuan hub is likely to survive Britain's decision to leave the European Union, but the vote could help foster the Chinese currency's internationalization by encouraging multiple yuan hubs in the bloc.
In the aftermath of the referendum, market-watchers and domestic Chinese media had raised fears London's leading role as an offshore yuan hub would be undermined, potentially setting back Beijing's efforts to internationalize the yuan.
But as the dust begins to settle, some bankers and analysts believe the pessimism was overdone. That is not to say there will not be an impact, but the move may encourage China to foster yuan trading in cities in mainland Europe and so expand the currency's global footprint.
"We expect London to keep its status as the world's largest foreign exchange center though some of the city's other financial services may have the risk to be moved to other countries following Brexit," said Andrew Fung, head of global banking and markets at Hang Seng Bank, adding FX trading is currently the key part of the yuan's internationalization.
Brexit comes at a difficult time. China is pushing to increase international use of the yuan ahead of inclusion in the International Monetary Fund's Special Drawing Rights basket in October, while also trying to control capital outflows.
London has played an important role in the internationalization of the yuan, which is also known as the renminbi (RMB). It was the world's second-largest offshore clearing center for the currency in March, payments operator SWIFT said.
Over the past five years, the big Chinese banks have established extensive yuan trading and clearing infrastructure in London and the first Chinese sovereign yuan bond issued outside China was listed in the city, in June.
In 2016 alone, more than 50 yuan-denominated bonds were listed in London, higher than in any other financial center outside Greater China, according to the London Stock Exchange Group.
"As the key ex-Asia RMB hub, with infrastructure laid and already in use, flows will not dry up. London is ahead of other designated hubs in the EU bloc by some margin," Shanghai-based Z-Ben Advisors said in a client note.
One concern is Britain could lose crucial financial services "passporting" rights, which allow UK-licensed firms to distribute financial products and services across the EU, said Andrew McGinty, partner at Hogan Lovells in Shanghai.
"If UK financial institutions lose EU passporting rights and RMB-denominated products can't be sold cross-border in the EU without fresh approvals, will that have an impact on China's willingness to continue to position the UK as its leading offshore international RMB financial center?"
Many business leaders believe it is unlikely the UK would lose these rights entirely.
Britain's long-established international investor base, which makes London attractive to China as an offshore hub, would be central to UK-EU negotiations, Brian Schwieger, head of equities at the LSE Group told Reuters last week.
"The close relationship between London and China is a key example why operating as a financial hub is so important to the UK and EU economy," he said.
Still, Brexit could prompt Beijing to hedge its bets and foster more offshore yuan hubs across the EU, analysts said.
"Frankfurt, Paris and Zurich are all very active in offshore yuan business," said Ngan Kim Man, deputy head of treasury at China Everbright Bank's Hong Kong branch.
Germany's Deutsche Boerse Group has agreed to create a joint venture exchange operator with the Shanghai bourse, in what many saw as a major coup for Frankfurt.
Hang Seng's Fung echoed that Paris and Frankfurt had an advantage, adding that Dublin was also in a strong position. Dublin is a low-tax base, Paris has good financial infrastructure and the European Central Bank is located in Frankfurt, he said.
"Brexit may not be a bad thing to China's global yuan plans, and it may create new space for the internationalization," said Raymond Yeung, a senior economist at ANZ in Hong Kong.
In addition, the fall of asset prices in the UK may encourage Chinese banks and companies to make more investment there, not less, he said.
(Reporting by Michelle Price and Michelle Chen; Editing by Neil Fullick)