Chinese banks are encountering obstacles to their expansion in the City of London as financial regulations there become increasingly strict, a member of the City of London's advisory council for China said on Wednesday.

The tighter regulations will also weaken Britain as an international financial center, said Wang Jianxi, executive vice-president and chief risk officer at China Investment Corp.

Since the financial crisis in 2008, the Financial Services Authority, or FSA, Britain's financial services regulator, has made it difficult for foreign banks to set up branches in the country. It has instead asked them to establish subsidiaries, which, according to the authority's regulations, are ring-fenced within Britain.

"The new regulations have made it very costly for Chinese banks in London," Wang said. "And if London has ring-fence rules (on foreign banks' subsidiaries), I really doubt that Chinese banks will still see a need to have operations here."

Wang warned that excessive financial regulations might hinder London's future as a hub for offshore renminbi trading, especially as Chinese banks move their investment and management teams to other jurisdictions.

Even so, he said current regulations have had little effect on renminbi liquidity in London. By December 2011, London had 109 billion yuan ($17.50 billion) worth of customer and interbank yuan deposits.

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Chinese banks in London have expressed concerns about the city's efforts to impose increasingly strict capital requirements on banks.

In October, the Financial Times reported that Chinese banks expressed frustration over such matters in a letter sent by the Association of Foreign Banks to Britain's Treasury.

Their main complaint concerned the FSA's refusal to let them open branches, which are offshore arms of foreign banks that the authority has little control over. Subsidiaries, in contrast, are subject to the strict capital requirements that apply to Britain's local banks.

The letter stated that Chinese banks were transferring their investment into other jurisdictions, such as Luxembourg, where the Bank of China Ltd and the Industrial and Commercial Bank of China Ltd have been allowed to open branches.

"London regulators are worried about foreign banks setting up branches because (such institutions) are not locally incorporated and hence have no capital requirements," Wang said.

"Therefore, they want foreign banks to set up a locally incorporated subsidiary that follows local rules."