Chinese banks are encountering obstacles to their expansion in the City of London as financial regulations there become increasingly strict, a member of the City of London's advisory council for China said on Wednesday.

The tighter regulations will also weaken Britain as an international financial center, said Wang Jianxi, executive vice-president and chief risk officer at China Investment Corp.

Since the financial crisis in 2008, the Financial Services Authority, or FSA, Britain's financial services regulator, has made it difficult for foreign banks to set up branches in the country. It has instead asked them to establish subsidiaries, which, according to the authority's regulations, are ring-fenced within Britain.

"The new regulations have made it very costly for Chinese banks in London," Wang said. "And if London has ring-fence rules (on foreign banks' subsidiaries), I really doubt that Chinese banks will still see a need to have operations here."

Wang warned that excessive financial regulations might hinder London's future as a hub for offshore renminbi trading, especially as Chinese banks move their investment and management teams to other jurisdictions.

Even so, he said current regulations have had little effect on renminbi liquidity in London. By December 2011, London had 109 billion yuan ($17.50 billion) worth of customer and interbank yuan deposits.

Chinese banks in London have expressed concerns about the city's efforts to impose increasingly strict capital requirements on banks.

In October, the Financial Times reported that Chinese banks expressed frustration over such matters in a letter sent by the Association of Foreign Banks to Britain's Treasury.

Their main complaint concerned the FSA's refusal to let them open branches, which are offshore arms of foreign banks that the authority has little control over. Subsidiaries, in contrast, are subject to the strict capital requirements that apply to Britain's local banks.

The letter stated that Chinese banks were transferring their investment into other jurisdictions, such as Luxembourg, where the Bank of China Ltd and the Industrial and Commercial Bank of China Ltd have been allowed to open branches.

"London regulators are worried about foreign banks setting up branches because (such institutions) are not locally incorporated and hence have no capital requirements," Wang said.

"Therefore, they want foreign banks to set up a locally incorporated subsidiary that follows local rules."

Bank of China first expanded into Britain in 1929 by establishing an agency office there, and a branch followed in 1946. The bank didn't have to set up a British subsidiary until 2007, when it was asked to do so by the FSA.

Although Bank of China has kept its branch, other Chinese banks that have recently moved into London, including Industrial and Commercial Bank of China, China Construction Bank Corp and Agricultural Bank of China Ltd, have not had the opportunity to open one.

Mark Boleat, chairman of the City of London's policy and resources committee, said the regulations are not discriminatory.

"The (Financial Services Authority) does not have a policy toward Chinese banks," he said. "It has a policy toward foreign banks, as do other regulators."

An FSA spokesman said discussions about relaxing the rules for Chinese banks have taken place between the authority and Chinese banks, declining to release further details.

Jimmy Leung, China banking and capital markets leader at the professional services company PricewaterhouseCoopers LLP, said one advantage Luxembourg has is its friendly policies and flexible regulations, which provide licenses for a variety of banking services to Chinese banks that register a subsidiary.

"What's more, lenders will also be allowed in this way to set up branches in other member countries of the European Union, lowering policy barriers and the cost of an overseas expansion."

Both Bank of China and Industrial and Commercial Bank of China have established branches in Rotterdam, the Netherlands; Lisbon, Portugal; and Brussels, Belgium.

Experts said the rising interest and increasing presence of Chinese banks in Luxembourg were also related to that country's strong position in Europe and the enormous business opportunities that have arisen from the forming of closer ties between China and Europe.

Gao Ming, chairwoman of ICBC (Europe) SA and general manager of ICBC Luxembourg Branch, said that even though London is an offshore center for yuan transactions, most of the capital flowing between China and Europe in trade and acquisitions has been processed through Luxembourg. That suggests a yuan market could be developed throughout Europe.

Guo Tianyong, banking research director at the Central University of Finance and Economics in Beijing, said: "Although Luxembourg may now be a good choice for Chinese banks that are looking to explore the European market, it's impossible for them to turn their backs on London, which is a world financial hub and a rising offshore center for the yuan."

Contact the writers at wangxiaotian@chinadaily.com.cn and cecily.liu@chinadaily.com.cn