A London forum held by the China Construction Bank (CCB), China’s second-largest bank by assets, to promote new investment schemes and Beijing’s bid to open its capital account signalled a new normal: the UK is seemingly outcompeting non-Asia rivals in the bid for access to Chinese capital.
The forum discussed the implications of Beijing’s renminbi qualified foreign institutional investor (RQFII) scheme, announced on October 15, to allow London investors to buy RMB80 billion ($13.1 billion equivalent) of mainland stocks, joining Singapore and Hong Kong, which have quotas of RMB50 billion and RMB350 billion respectively.
The UK became the only jurisdiction outside of Asia to be allocated a quota.
On Monday, CCB marketed its custodian business to London-based investors looking to access Chinese products and announced its intention to apply for a retail licence, highlighting the deepening footprint of Chinese banks in the City.
The quota will allow UK-based asset managers to invest in mainland securities markets through authorized UK funds in RMB.
“RQFII follows the same application procedure as QFII, but with more flexibility,” says Sophie Hu, QFII service division chief at CCB custody and investor services, with liquidity for public funds accessible on a daily basis as opposed to weekly for QFII.
The forum comes as China’s new leadership pushes forward with economic liberalization and possibly the opening of its capital account – a course made clear during the third plenum in November and with the launch of China’s first free-trade pilot zone in Shanghai on September 29.
The development of the RQFII equity programme is closely tied to the internationalization of the RMB, says Deborah Yang, managing director and head of MSCI index business across Europe, Middle East, Africa and India, boosting London’s competitive advantage as a financial hub.
She adds: “If China wants the renminbi to be a global, offshore currency, London is the most strategic location [for the RQFII programme]. It has some of the best managed institutions and asset managers – it’s a natural hub.”
CCB’s Hu adds: “RQFII is actually a much more convenient way to promote cross-border RMB trade as well.”
This October, the RMB became the second most-used currency in the trade finance market. According to Swift RMB tracker, the use of RMB in this market grew from an activity share of 1.89% in January 2012 to 8.66% in October 2013.
London focus for CCB
During the forum, CCB also announced it will be taking advantage of the change in British regulation last year to open a retail banking branch in the UK.
The decision comes after CCB opened its official European headquarters in Luxembourg at the end of October, after a decision in September 2012.
CCB is the third Chinese bank to choose Luxembourg as their European headquarters, after the Bank of China and ICBC, fuelling speculation the European city is outcompeting London in the bid for Chinese capital.
Yang Xinfeng, general manager of CCB’s custody and investor services department in Beijing, says: “We opened our headquarters in Luxembourg because it was strategic: Luxembourg is the port of Europe.
“We will probably end up investing more in our UK branch, but we are still preparing our application. It is very important for us to have a branch in London, and currently we do not have a retail licence here.
“If we open up a branch in the UK, however, it will mean that we can have a retail licence and broaden our business here.”
UK regulators have actively sought to promote Chinese investment in the UK in recent months, after regulations introduced by the Financial Services Authority in October 2012 limited the number of foreign bank branches that could be opened in the City.
The measure led to a letter of complaint to the UK Treasury by the Association of Foreign Banks on behalf of Chinese institutions, citing onerous liquidity requirements in the UK, among other things, as an unnecessary hindrance.
Policymakers in China were also disappointed last December after the Bank of England (BoE) initially refused to consider a swap line with Beijing.
Tensions eased, however, once a decision was finally made in June to implement a reciprocal three-year currency swap line between the BoE and the People’s Bank of China, and in October when the UK Treasury intervened to allow Chinese banks to open a UK branch, without the need to have a fully funded subsidiary model.
The forum comes as UK prime minister David Cameron makes his second trip to China to meet premier Li Keqiang and president Xi Jinping to discuss a free-trade agreement between the European Union and China, and to further deepen the UK’s position as the premier offshore renminbi hub for China in the west.