Chinese-funded Banks Enter the City of London – A Win-win Choice

By+LI+GANG

ON the back of Chinas extraordinary economic growth， Chinese-funded banks have brought the country closer to its ultimate goal to “go global.” The breakout and spread of the international financial crisis challenged Chinese-funded banks， but at the same time brought unprecedented opportunities. The U.K.s trade in the realm of financial services –second only to the U.S. – gives it a clear competitive edge. As an international financial center and the worlds largest trading market for foreign exchange， derivatives and securities， London constitutes a tailor-made environment for investment and finance. After a gradual entry into the City of London， Chinese-funded banks are heading rapidly towards internationalization. The consequent fastapproaching internationalization of the RMB will give Chinese enterprises the financing impetus they need to“go global.” It will at the same time promote Sino-British trade and speed up the U.K.s economic recovery.

Course and Operation

The internationalization of Chinese-funded banks began almost 100 years ago. The Bank of China （BOC） first set up a London office， known as the “Bank of China London Agency，” in November 1929. BOCs first overseas office， the agency was also the first overseas financial institution ever formed by a Chinese bank， and hence a historical landmark.

BOC later successfully opened four other U.K. branches， although the London office showed the best business performance. After the global financial crisis the U.K. imposed more stringent financial regulations. Under pressure from the Financial Services Authority（FSA）， BOC accordingly transformed its branches into subsidiaries. In October 2007 – 78th anniversary of the London Branch – the FSA approved BOCs establishment of a U.K. subsidiary – the Bank of China （U.K.） Limited， with a registered capital of ￡200 million. During its four-year transitional period， BOC launched a“dual-track” branch and subsidiary operation， whereby its former five branches became affiliated agencies under BOC （U.K.） Limited.

As even the global financial crisis failed to alter Londons status as world major financial center， Chinesefunded banks have seized the opportunity to enter the City of London. All five of Chinas major state-owned commercial banks， namely Bank of China， Industrial and Commercial Bank of China， Agricultural Bank of China， China Construction Bank and Bank of Communications， have established operating subsidiaries in the U.K. Other Chinese-funded banks have also set up non-operating agencies in the U.K. capital. They include China Merchants Bank， which opened its London office on July 16， 2009， and Shanghai Pudong Development Bank， whose London representative office was inaugurated on October 31， 2013.endprint

State-owned Chinese-funded banks in the U.K. have established subsidiaries， but none is permitted to set up branches. There is a significant difference between a subsidiary and a branch. The former is a legal entity independent of the head office. U.K. financial regulations stipulate that subsidiaries of foreign-funded banks operate according to the same supervisory standards as local banks. The Prudential Regulation Authority indeed imposes stringent standards with regard to bank transparency， cushion capi- tal， and liquidity assurance. A branch， on the other hand， is part of the parent bank and not an independent legal entity. Upon registering overseas， the branchs assets and liabilities still belong to the head office， which consequently has direct control over the branchs business. As it works with monetary authorities in both the home and host country， a branch is capable of operating a broader range of business. The demands created by Chinese-funded banks expanded business， however， have outstripped their subsidiaries operational capacity. China and the U.K. are consequently negotiating the setting up of Chinese-funded bank branches in Britain. Camerons visit to China last December brought positive prospects for the two countrys deepened financial cooperation.

Promote RMB Internationalization

Statistics show that the “Square Mile，” as the City of London is also known， has sustained its number one ranking among top international financial centers since the mid-17th century. In April 2012， Londons foreign exchange transactions accounted for 38 percent of the global total – more than double that of the U.S.， in second place. As the worlds largest center for cross-border banking and credit， London has a 19 percent share of the global market. The city also takes the lead in derivatives trading， fund management and private equity investment.

London has been proactive in promoting construction of an RMB offshore trading hub. In April 2012， HSBC issued the first RMB-denominated bond with total volume of RMB one billion – an important step towards this goal. Since then， a number of RMB offshore businesses have appeared that specialize in cross-border RMB settlement， RMB loans and deposits， cross-border trade and financing， and RMB stock. Construction of this hub implies that the RMB is recognized by the worlds largest financial market， and that it can serve as a model for other European financial centers to follow by launching RMB offshore business. The City of London is now the worlds leading RMB foreign exchange trading center. RMB foreign exchange transactions have hit a daily RMB four billion， accounting for 26 percent of global RMB offshore business – second only to Hong Kong.endprint

Since China is now the worlds second largest economy， the RMB will become increasingly important within the international monetary system. An RMB offshore trading center will strengthen Londons status as world financial center and so promote its proactive construction of an RMB offshore trading hub. Londons significant contribution towards internationalization of the RMB will expand the RMB offshore trade market， so promoting product innovation， and increase market liquidity and confidence. In this sense， Chinese-funded banksentry into the City of London is a prerequisite for RMB internationalization. As the first Chinese-funded bank to embark on overseas business， Bank of China （U.K.） Limited has gradually expanded business in the fields of cross-border RMB settlement， RMB trade financing， RMB savings deposits， RMB deposits due to other banks， and RMB spot exchange transactions. It has also improved services that will enable Chinese enterprises to“go global，” and to serve excellent local enterprises that have close economic and trading contacts with China. The BOC （U.K.） Ltd will thus contribute to development of the London offshore RMB market and to the course of RMB internationalization.

Ease of Finance

By the end of 2012， U.K. direct investment in China had reached US $18.76 billion – second largest among EU countries. Owing to the European debt crisis， however， local U.K. enterprises had no option but to reduce their investment. The British government has consequently gone all out to attract Chinese enterprises investment in the U.K. in efforts to hasten economic recovery. In light of this opportunity， Chinas investment in the U.K. has grown in leaps and bounds. According to the U.K. Trade & Investment， in 2011 Chinese enterprises undertook 37 new investment projects – a growth of 61 percent– and Chinas 92 direct investment projects in the U.K. created 2，160 jobs. Although in 2012 China lowered its total number of direct investment projects to 70， job opportunities nonetheless grew to 3，409. At the end of 2003， Chinas total direct investment stood at ￡102 million， but by 2012 had reached ￡1.17 billion， according to the National Statistics Bureau – a 10-fold growth within a decade. Investments over the past 18 months by the 500 or more Chinese enterprises that have now set up offices in the U.K. exceed the cumulative total of the past 30 years.

Bank of China （U.K.） Limited uses its inherent advantages to provide China-invested enterprises with such services as market surveys and the opening of accounts. Ninety percent of Chinese enterprises in the U.K. are clients of the Bank of China （U.K.） Limited， and in recent years China-invested enterprises have experienced rapid development through mergers and acquisitions. The Bank of China （U.K.） Limited has taken this opportunity to offer them such services as information collection， legal consultation， valuations and pricing， financing arrangements and transaction deliveries.endprint

Promote Sino-British Trade

In the early 1990s， the total volume of commodity trade between China and the U.K. stood at a paltry US$3.59 billion， according to General Administration of Customs of the Peoples Republic of China statistics. Since then this figure has shown an upward trend， total cargo trade in 2012 having reached US $63.11 billion. The U.K. is now Chinas third largest trade partner in the EU. In 2012， Chinas exports to the U.K. hit US $46.29 billion， representing a year-on-year increase of 4.9 percent. Chinas imports from the U.K.， meanwhile， were US$16.82 billion， a year-on-year increase of 15.5 percent. The growth of bilateral trade is hence remarkable， as National Bureau of Statistics data show. In 1998， U.K. exports to China accounted for just 0.5 percent of its total –a figure that grew to four percent in 2012. The same year， U.K. imports from China were just 1.6 percent of its total– a figure that by 2012 had grown to 7.7 percent.

Although China has become the worlds largest exporter， the RMB is at the same level as the Danish krone in terms of global payments. To promote the RMB from an invoicing currency to an international settlement currency， on July 6， 2009 the BOC initiated cross-border RMB settlement business. But in 2011， still only nine percent of Chinas foreign trade turnover was settled in RMB. The Bank of China （UK） Limited accordingly launched comprehensive RMB products and services to expand overseas RMB business. In 2012， the banks use of RMB in cross-border settlement reached RMB 35 billion – a figure that exceeded RMB 50 billion during the first eight months of 2013. Cross-border RMB settlement helps Chinas import and export enterprises avoid currency exchange rate risks， guarantees import and export enterprises income， hastens settlement speed， and increases efficiency of capital usage. Most importantly， it promotes Sino-British economic relations and trade and maintains a steady increase in bilateral trade.

Promote the U.K.s Economic Recovery and Create More Jobs

The impact of the global financial crisis and European debt crisis and of double-dip recession has had a cumulatively detrimental effect on the U.K.s macro-economic situation since 2008. Confronted with this bleak economic prospect and various other adverse factors， the U.K. has constantly adjusted its macroeconomic policy and carried out financial and monetary policies to promote economic growth. Appropriate economic incentive measures have resulted in gradual improvement of all its economic indicators.endprint

Strengthening Sino-British economic and financial cooperation is nevertheless vital to the U.K. The Square Mile can potentially create more than 300，000 jobs， posts in the capitals financial services sector having increased from 360，600 in 2011 to 366，700 in 2012， according to a City of London report. Rapid development of the London offshore RMB market has also made undeniable contributions to the recovery of Londons economy and to reducing unemployment. In 2012， the RMB volume in Londons financial market reached US $2.5 billion per day – 2.4-fold that of 2011， according to a City of London report. RMB import and export financing operations reached RMB 33.6 billion – double that of 2011. Letter of credit and other credit guarantee business also rapidly increased to a total of RMB 4.7 billion – 13-fold that of 2011. The rapid growth of RMB business， along with Chinese-funded banks expansion and deepening of bilateral trade and mutual investment， have thus created numerous job opportunities in the City of London and promoted the UKs economic recovery.endprint