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23 Oct 2013

The next step with China

Spencer Lake

by Spencer Lake

Global Head of Capital Financing, HSBC

The next step with China

The UK is welcoming investment, trade and visitors from China

China’s growing importance to the West and to the UK in particular has been highlighted by George Osborne’s recent visit. The UK Chancellor’s five-day trip included a series of initiatives to boost trade and investment and showcase the growing internationalisation of China’s currency, the renminbi (RMB).

New Chinese investments were announced in UK-based technology projects, in Manchester’s “Airport City” scheme, and potentially in nuclear power. Other measures included new airline routes and flights, quicker visa clearance, and co-operation on a number of issues from health reforms to intellectual property protection, online trade, and the development of traditional Chinese medicine.

The UK is looking to capitalise on China’s growth at a time when the country is becoming more important to the world economy. The UK is also welcoming investment, trade and visitors from China. One of the most significant achievements of the visit has been the agreement to cement London’s role as a global offshore hub for RMB trading and to make London a centre for RMB investment into China.

The level of trade and investment between the two countries is already growing strongly, and the two have set a target of USD100 billion for trade between them in 2015. The UK attracted the largest volume of Chinese investment among European countries in 2012, while China-UK investment flows increased 95 per cent year on year.

The UK is also winning a major share of global RMB trading outside China, totalling 62 per cent in September 2013. This suggests that the initiative to promote London as a major centre for RMB business outside Asia, led by the City of London and supported by HSBC, is working. RMB currency trading globally has trebled since 2010.

The UK is looking to capitalise on China’s growth at a time when the country is becoming more important to the world economy

But this is only the beginning. Use of the RMB outside China is growing fast. In a typical month, 160 countries do business in RMB. Currency swap or settlement agreements have been signed in 23 territories. In addition to Hong Kong, which pioneered the offshore RMB, London, Singapore and Taiwan are developing as RMB centres. Further ahead, as the RMB goes global, others such as Toronto, Frankfurt and Dubai may join them.

However, there is still a mismatch between trading in RMB and the size of China’s economy. Though exporters and importers paid or were paid with RMB five times more in 2012 than in 2010, these payments amounted to only 10 per cent of China’s total trade. HSBC expects this proportion to rise to one third by 2015. The RMB has become the world’s eighth most traded currency, but if it were fully convertible it could rise to third place.

A new agreement to allocate RMB Qualified Foreign Institutional Investors (RQFII) licences to London-based funds clears the way for the next stage of London’s growth as an RMB centre. UK investors will now be able to seek a licence to invest in RMB directly in Chinese shares, bonds and other assets with an initial quota of RMB80 billion (USD13 billion).

The UK is the first country outside Asia to be granted an RQFII quota. Separately, Chinese banks will begin talks with the UK’s Prudential Regulation Authority to enable them to set up wholesale branches in the UK. We have seen China moving cautiously, but unmistakably towards freer use of the RMB internationally. Allowing investors to move funds more freely by liberalising capital markets is well under way through RQFII and other schemes, largely aimed at institutional investors.

These initiatives can help to increase capital inflows and outflows from China to support their “going out” strategy. The effect is clear – increased and freer trading in RMB. The process of liberalisation will be given a further boost when the Shanghai free-trade zone goes live, with the promise of capital account convertibility for the RMB. Taken together, these moves towards freer trade and investment will help the rapid progress that has propelled China for three decades and is set to make it the world’s largest economy.

A version of this article originally appeared on The Telegraph website on 20 October.

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