Lord Mayor focused on post-Brexit positives

Lord Mayor Jeffrey Mountevans [Photo by Tim Jenkins/For China Daily]

The Lord Mayor of the City of London, Jeffrey Mountevans, is visiting China this week to push for closer UK-China financial ties while acknowledging Brexit is likely to be the single most pressing question coming from his Chinese counterparts.

Mountevans is fully prepared and plans to say that Brexit will not shake London's status as the premium European financial hub while noting that the UK wants to further support China initiatives, such as green finance, maritime financing and infrastructure financing along the Belt and Road map, all of which are Brexit-irrelevant.

Mountevans' weeklong trip, during which he will visit Beijing, Shanghai, Tianjin and Hong Kong, reflects how seriously and quickly London's financial leaders are turning toward China as a closer partner immediately post Brexit.

On July 22, British chancellor Philip Hammond and City of London policy chairman Mark Boleat led a delegation of the UK's major financial services and legal firms attending 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.

The message from Britain is uniform and firm and was well summarized by Mountevans at a pre-departure press conference.

"I will reiterate our commitment to deepening the long-standing links between the UK and China. I will explore new ways for us to work together,” he said.

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 on London's ‘passporting' right, 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 post 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 is so huge, and the need to help finance Chinese investment into the UK is significant enough to keep them interested.

Li Biao, chairman of China Construction Bank London, said 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 Netherland.

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, which gained a European presence through acquiring Spain's Banco Espírito Santo de Investimento, 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 partnering with different local law firms in each European city, so potential lost work in London could be gained by its European lawyers.

"Our perspective is global, not London centric,” said 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, said 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.

In truth, much of the China-related activities will still 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 issue in London, thanks to the City's high concentration of lawyers, accountants, legal advisors and syndicates already familiar with renminbi bonds sales.

In the first half of this year, more yuan bonds were listed on the London market than all other exchanges combined – 55 issues coming from a wide spread of international instructions.

Michael Taylor, managing director and Moody's chief credit officer for the Asia Pacific Region, said that, although offshore renminbi bond issuance globally has reduced 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 said.

There are 95 yuan bond issues listed on the London Stock Exchange, raising 37.6 billion yuan (USD 5.97 billion). Chinese companies choose London to list because it is the most international. Forty-two Chinese companies are listed on the LSE, worth $116 billion.

"A leading financial services infrastructure is not built overnight,” said 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's RMB activities

Statistics 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 is so huge recently that it has amounted to about a 1 trillion yuan 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, said London's renminbi transactions have high liquidity, hence increasingly, renminbi activities generating 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 profiles.

Although Brexit could impact UK-China trade volumes – as Chinese manufacturers could no longer use the UK as a platform to export tax-free to the EU and renminbi trade financing could reduce - 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 bounded by physical trading.

These financial activities mostly refer to using renminbi in commodities trading, foreign exchange trading, and the trading of derivative products. Renminbi internationalization's focus from trade to investment also presents a more mature step, 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 activities are not only market driven. The Chinese government's past support for London's renminbi activities - 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 hugely 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, said 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 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.