By LI GANG
2014-February-17
Chinese-funded Banks Enter the City of London – A Win-win Choice
ON the back of China’s 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 world’s 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 fast-approaching 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. BOC’s 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 BOC’s 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 London’s status as world major financial center, Chinese-funded banks have seized the opportunity to enter the City of London. All five of China’s 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.
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 capital, 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 branch’s assets and liabilities still belong to the head office, which consequently has direct control over the branch’s 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. Cameron’s visit to China last December brought positive prospects for the two country’s 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, London’s foreign exchange transactions accounted for 38 percent of the global total – more than double that of the U.S., in second place. As the world’s 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 world’s 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 world’s 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.
