Focusing on post-Brexit positives

Updated: 2016-09-16 07:12

By Cecily Liu in London(China Daily Europe)

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British officials are emphasizing that a pending divorce from the EU doesn't alter the United Kingdom's growing economic ties to Beijing

Lord Mayor of the City of London Jeffrey Mountevans made a great effort to push for closer UK-China financial ties in the post-Brexit landscape on his recent China visit.

Mountevans repeatedly emphasized to Chinese officials and journalists that Brexit will not shake London's status as the premium European financial hub. He also noted that the UK wants to further support China initiatives such as green finance, maritime financing and infrastructure financing along the Belt and Road map, none of which are affected by Brexit.

 Focusing on post-Brexit positives

Lord Mayor Jeffrey Mountevans says Brexit will not shake London's status as the premium European financial hub. Provided to China Daily

Mountevans' weeklong trip, visiting Beijing, Shanghai, Tianjin and Hong Kong, reflects how seriously and quickly London's financial leaders are turning toward China as a closer partner immediately after Brexit.

On July 22, British Chancellor Philip Hammond and Mark Boleat, City of London policy chairman, led a delegation of the UK's major financial services and legal firms at the UK-China financial services roundtable in Beijing, during which they emphasized Britain's continued openness to Chinese financial cooperation. Two days later, on July 24, Hammond proposed a possible free-trade agreement between the UK and China.

Speaking to Chinese journalists in Hong Kong on Sept 9, Mountevans said London's status as a renminbi internationalization center in the West is not affected by Brexit, and he said the UK looks forward to working closely with financial communities in Hong Kong and Beijing to further strengthen renminbi internationalization.

Perhaps London's financial community is turning to China out of Brexit shock and desperation.

London emerged as a global financial center thanks to an array of Asian, American and Middle Eastern financial institutions surging into the city during the past 30 years, leveraging London's "passporting" rights, which allowed them access to the European single market without having an EU presence. But London's passporting could easily be lost post-Brexit.

Consequently, JP Morgan said it could axe up to 4,000 UK jobs after Brexit, while HSBC has suggested up to 1,000 positions could be moved to Paris.

So what about Chinese banks?

So far, no Chinese banks with a presence in London have made a point of reducing their London operations, mainly because London's opportunities to grow offshore renminbi businesses are so significant, and the need to help finance Chinese investment in the UK is significant enough to keep them interested.

Li Biao, chairman of China Construction Bank London, says CCB London makes very little use of passporting to conduct EU businesses because CCB already conducts extensive EU work across its numerous EU branches, including those in Frankfurt, Zurich, Luxembourg, Paris, Italy, Spain and the Netherlands.

In addition to the CCB, Bank of China, Industrial and Commercial Bank of China, Bank of Communications, China Merchants Bank and Agricultural Bank of China all have a significant presence in Luxembourg, the leading European competitor for London's renminbi activities.

Banks aside, many other Chinese financial services firms also scarcely use passporting. Haitong Securities, gained a European presence through acquiring Portuguese Banco Espirito Santo's investment arm, which currently has its headquarters in Lisbon, despite having a significant investment banking arm in London.

Shanghai-based Yingke Law Firm operates across various European cities through partnerships with different local law firms in each city, so potential lost work in London could be picked up by its European lawyers.

"Our perspective is global, not London centric," says global managing partner Linda Yang.

And Brexit could even encourage closer China cooperation because the UK will no longer need to strictly follow some complex and less relevant EU regulations, says Andrew Carmichael, capital markets partner at the London-based law firm Linklaters.

With new regulatory freedom, UK regulators could, for example, treat Chinese regulation and systems as substantially equivalent to UK regulations and hence give automatic recognition to Chinese-regulated banks, Carmichael said.

Much of the China-related activities are still expected to come to London. Chinese companies want to list on the London Stock Exchange, due to the LSE's large trading volumes and liquidity, and London's concentration of stock researchers and investors from Asia, Europe and Africa. Renminbi bonds will be issued in London, thanks to the city's high concentration of lawyers, accountants, legal advisers and syndicates already familiar with renminbi bond sales. In the first half of this year, more yuan bonds were listed on the London market than on all other exchanges combined - 55 issues coming from a variety of international institutions.

Michael Taylor, managing director and Moody's chief credit officer for the Asia Pacific region, says that while offshore renminbi bond issuance globally has dropped in recent months, "there is no direct correlation with Brexit". It is, rather, due to renminbi depreciation and considerable migration of issuance by Chinese entities to the onshore bond market, he says.

There are 95 yuan bond issues listed on the London Stock Exchange, raising 37.6 billion yuan ($5.6 billion; 5 billion euros; 4.27 billion). Chinese companies choose London to list because it is the most international. Forty-two Chinese companies, worth $116 billion, are listed on the LSE.

"A leading financial services infrastructure is not built overnight," says Jinny Yan, chief China economist at ICBC Standard Bank, who added that London's expertise in debt capital markets, financial technology, public-private partnerships and financial regulation certainly provides valuable lessons for China, Brexit or not.

London still has place set for yuan

Results two months after Brexit have proven London's status as the Western offshore renminbi hub remains unchallenged.

According to London's official renminbi clearing bank, China Construction Bank London, renminbi transaction volume growth has been so huge recently that it has amounted to about a 1 trillion yuan ($150 billion; 133 billion euro) increase every two months. Such growth is significant, considering that CCB London cleared an aggregate of 10 trillion renminbi transactions between June 2014 and August 2016.

Li Biao, chairman of CCB London, says London's renminbi transactions have high liquidity, hence increasingly, renminbi activities generated in other geographical locations are now being cleared through the UK capital. For example, the Chicago Mercantile Exchange in the US has opened an account with CCB London to clear all of its renminbi-related transactions.

Such cross-border renminbi clearing activities do not rely on UK-EU cooperation and are not affected by Brexit. CCB London currently provides renminbi clearing services for 67 financial institutions, of which only 24 are Chinese organizations, demonstrating its international client profile.

Although Brexit could impact UK-China trade volumes - as Chinese manufacturers likely no longer will be able to use the UK as a platform to export tax free to the EU and renminbi trade financing could drop - the good news is that London's renminbi activities are increasingly aimed at financial activities and derivative products, which are much larger in volume and not bound by physical trading.

These financial activities mostly refer to using renminbi in commodities trading, foreign exchange trading, and the trading of derivative products. The shift of renminbi internationalization from trade to investment also is considered a step in the maturing process, in preparation for the renminbi becoming a reserve currency.

Offshore renminbi activities in London have increased rapidly in recent years. One key milestone came in April when London overtook Singapore to become the second-largest offshore RMB clearing center behind Hong Kong, according to data from Swift, the global payments system.

However, London's growing renminbi activity is not only market driven. The Chinese government's past support for that activity - through initiatives such as appointing a clearing bank in London, setting up a renminbi swap with the Bank of England, and granting London a RQFII (renminbi qualified foreign institutional investor) quota for London investors investing in China - have greatly helped London's renminbi growth so far.

Hence recent uncertainties in UK-China bilateral relationships caused by, for example, the delay in approval of the UK's Hinkley Point nuclear deal, are not helpful, says Miranda Carr, senior analyst at Haitong Securities (UK), who added that financial deals are unlikely to be considered by the Chinese government "in isolation".

The 18 billion pound ($24 billion; 21 billion euro) Hinkley Point deal is set to be one-third financed by China General Nuclear Corp. The Chinese ambassador to the UK, Liu Xiaoming, has described bilateral relations as being at a "critical juncture" because of the delay in Hinkley Point's approval.

(China Daily European Weekly 09/16/2016 page25)