London eyes booming yuan market amid closer financial ties with China

This year marks the 10th anniversary of the comprehensive strategic partnership between the UK and China, a long-term commitment that has facilitated steady growth in bilateral trade and investment over recent years. China is now the UK's largest trade partner outside the US and the EU. In 2013, trade in goods and services between China and the UK reached ￡50.4 billion (US$81.5 billion). UK exports of goods and services to China reached ￡15.7 billion — a 15 percent increase from 2012, while China's reciprocal exports to the UK accounted for ￡34.7 billion.

The UK was ranked as China's third-largest source of imports in the EU last year and the second-largest European investor in China. Furthermore, the UK has overtaken France as the second most popular destination for Chinese outbound investment within the EU. Recent investments have included Greenland Group's ￡550 million investment in the Canary Wharf Hertsmere Tower project and the Sanpower group's ￡480 million acquisition of an 89 percent stake in department store chain House of Fraser.

The UK's position as a top global destination for foreign direct investment and the UK government's desire to attract more international investment in infrastructure development are complementary to China's ambition to further increase overseas investment. The UK is extremely keen to work with China to stimulate jobs and growth in both countries, achieving sustainable growth in areas including advanced engineering, information and communication technology, financial services and low carbon, green technology — areas where the UK excels and industries that are in demand as the Chinese economy rapidly grows.

China has well integrated into the world economy, and poised to become the world's largest economy. When it comes to international trade and commerce, London is the global leader. For financial services, this is thanks to its global links, business-friendly environment, well-established legal and regulatory structures and unrivalled, multicultural talent pool. It is because of these factors that more than 400 Chinese companies have chosen the UK as their overseas base, leveraging the UK as a gateway to expand their business into Europe and beyond.

Significant benefits

These Chinese companies have brought significant benefits to the UK economy, including capital and employment opportunities, cultural diversity and much needed knowledge of the Chinese market.

The recent granting of a UK wholesale branch license to Industrial and Commercial Bank of China, the country's No.1 bank, is welcome news and we hope the move will enable ICBC to grow its business and enhance its UK operations.

This year is a highly productive year for UK-China relations. The two countries have seen a frequent exchange of high-level visits and economic dialogue. After Prime Minister David Cameron's and Chancellor George Osborne's visits to China last autumn, Chinese Premier Li Keqiang and Vice Premier Ma Kai have led Chinese delegations to visit the UK.

Highlights of these visits included the UK-China Financial Summit and the 6th UK-China Economic and Financial Dialogue, which resulted in billions worth of business deals and a number of agreements on policy, trade and investment, culture and tourism. It was also reconfirmed that London plays a key role as a major global centre for yuan business. Of course, the significance of these visits is much broader than the numbers. They show the commitment by China and the UK to further develop a stronger partnership, build long-lasting bilateral business opportunities and encourage ongoing dialogue in areas of mutual interest.

The City of London welcomed these distinguished Chinese guests and facilitated meetings with the UK financial services community. For us, it was a great honor to have Premier Li address an audience at Mansion House in June. The city also hosted a high-level roundtable discussion between senior UK-based financial industry experts and a Chinese delegation led by Vice Premier Ma in September, where participants agreed that there were many opportunities for collaboration in the financial sector. We look forward to supporting further innovation and progress in areas such as the internationalization of the yuan, the development of China's bond market and increased investment opportunities between the UK and China.

Yuan initiative

London needs to remain at the forefront of global markets, and we launched the City of London's yuan initiative in April 2012 to develop the offshore yuan market in London. Research highlights that London has continued its steady growth in yuan trade finance and foreign-exchange business. We work in coordination with both the public and private sectors in China and the UK to strengthen London's position as a leading offshore yuan business centre and build a long-term, sustainable market that supports the internationalization of the yuan.

There are a series of developments that have facilitated the growth of that business, including China Construction Bank's appointment by the People's Bank of China as a clearing bank in London, the first officially named clearing bank for yuan trading outside Asia. There were also the agreement to allow direct foreign-exchange trading between the yuan and the British pound, and the UK government's announcement of its intention to issue the first sovereign yuan bond outside of China.

The development of London's yuan market is also demonstrated by the latest SWIFT's RMB Tracker, which shows that Europe is leading the adoption of the currency beyond Asian countries, representing 10 percent of total yuan payments by value worldwide. The UK financial sector, in particular, continues to attract yuan business, with 123.6 percent growth recorded by SWIFT in the year ending July 2014.

However, there remains work to be done to continue to develop the yuan business in the UK. Specific areas that offer potential for investors and firms include encouraging the UK market participants to develop further products and services, such as a secondary bond market, and creating new opportunities for Chinese investors in the UK when the Renminbi Qualified Domestic Institutional Investor (RQDII) scheme is launched. There remains much potential for growth in yuan usage in the UK, and we are confident of seeing further developments in this important market.

China's development is interwoven with the rest of the world, and China's financial system is evolving rapidly. Comprehensive reforms have been introduced over the last decade, with the pace of reform particularly quick in the past two years. This direction of reform was underpinned by the Third Plenum last year, with its restated commitment to shifting to a more market-driven economy. The People's Bank of China's measures to encourage cross-border use of yuan, the Shanghai Gold Exchange's launch of an international trading board to open the market to foreign investors, the Shenzhen State Administration of Foreign Exchange's recently announcement that will allow foreign investors to trade carbon permits in Shenzhen and the landmark Shanghai–Hong Kong Stock Connect scheme will allow overseas investors to gain direct exposure to China's capital market.

All are positive steps toward further opening up, and create welcome opportunities for both Chinese and global markets to continue to develop. The City of London supports China's steps toward liberalization of its markets. One of the objectives of the City of London's China program is to share expertise and assist the growth and development of the Chinese financial sector.

Both the UK and China are committed to carrying forward bilateral relations into a new phase, and it is essential that the close ties already established be strengthened. Further engagement in areas such as legal services, financing for small and medium-sized firms, financial and professional services, education, training and qualifications are also issues that both nations will look to explore in the future. We look forward to finding new ways to support the development of this comprehensive strategic partnership over the next 10 years.