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

Since China is now the world’s second largest economy, the RMB will become increasingly important within the international monetary system. An RMB offshore trading center will strengthen London’s status as world financial center and so promote its proactive construction of an RMB offshore trading hub. London’s 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 banks’ entry 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, China’s 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 China’s 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, China’s 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.

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 People’s 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 China’s third largest trade partner in the EU. In 2012, China’s exports to the U.K. hit US $46.29 billion, representing a year-on-year increase of 4.9 percent. China’s 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 world’s 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 China’s 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 bank’s 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 China’s 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.

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 capital’s 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 London’s economy and to reducing unemployment. In 2012, the RMB volume in London’s 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 UK’s economic recovery.

Li Gang, a Ph.D. in economics, is with the Institute of European Studies of Chinese Academy of Social Sciences.