Lenders bank on European growth

Industrial and Commercial Bank of China's office in Luxembourg. (Photo: Cecily Liu/China Daily)

Leading Chinese institutions are seamlessly transitioning into the global financial system by establishing branches across Europe

Chinese banks are increasingly expanding into Europe to better internationalize the renminbi and integrate China's financial services into the global financial system.

The expansion has provided European investors opportunities to invest in China's domestic market and Chinese banks in Europe the flexibility to contribute to the continent's development of offshore renminbi activities, which is increasingly important for international trade and finance.

The largest Chinese banks currently have overseas operations in major European financial centers such as London, Frankfurt, Paris and Luxembourg.

In Luxembourg, for example, Bank of China, Industrial and Commercial Bank of China and China Construction Bank have already established their European headquarters. BOC was the first Chinese bank to open a branch in the city, back in 1979.

In 1991, BOC then opened a subsidiary in Luxembourg to prepare for the bank's expansion into other European countries using the European Union's single passport policy. Five branches managed by BOC Luxembourg were subsequently established in Rotterdam, Brussels, Warsaw, Stockholm and Lisbon.

ICBC's expansion in Luxembourg follows a similar path. It established a representative office in 1998, which was quickly upgraded to a branch in 1999. In 2006, ICBC established a subsidiary in Luxembourg to prepare for the bank's continental expansion.

In October 2013, China Construction Bank became the third Chinese lender to set up European headquarters in Luxembourg.

Nicolas Mackel, CEO of Luxembourg for Finance, an agency for the nation's development of the financial center, said the expansion of Chinese banks in Luxembourg has played a key role in helping the landlocked country grow its offshore renminbi activities. He said that Chinese banks have greatly contributed to the city's renminbi deposits and loans.

Mackel said a number of European financial hubs are cooperating by building off each of their strengths to create offshore renminbi activities.

Luxembourg's strengths, for example, in fund management, asset management and bond listing, help explain the high number of Luxembourg-incorporated funds investing in China and the large number of dim sum bonds－bonds issued outside China but denominated in the yuan－listed on the Luxembourg Stock Exchange.

BOC was also the first Chinese bank to establish in London. It opened an agency office in November 1929 with five employees and upgraded it to a branch in 1946.

BOC's footsteps in London have, in recent years, been followed by a number of Chinese banks, including private banks such as Shenzhen-based China Merchants Bank and Shanghai-based SPD Bank, both of which have established representative offices in London.

One major milestone in London that cleared the way for Chinese banks came in 2013, when all foreign banks were allowed to open branches in the city. By opening branches, ICBC and CCB have had greater opportunities to offer its services than they would have if only allowed subsidiary status.

Branches, seen as overseas arms of international banks, have lending and financing capacity proportionate to the parent company's balance sheets. Subsidiaries, in contrast, are subject to the strict capital requirements that apply to local banks in the United Kingdom. In most cases, the lending and financing capacity is proportionate to the balance sheets of the subsidiary itself.

Andrew Carmichael, a partner at Linklaters law firm in London, said having a full branch license makes it much easier for a Chinese bank to offer funding to British, and to some degree, all European Union borrowers. The regulatory easing dovetails with the significant amount of trade with China, an increasing proportion of which will be settled in the Chinese currency, he adds.

Carmichael said it is also important for Chinese banks to internationalize because their customers may use yuan for acquisition financing but will need local funding for ongoing operations.

He says his team at the law firm is already seeing State-owned enterprises and other Chinese organizations issue euro-denominated bonds, which gives businesses local funds and banks the ability to lend in local funds.

What's more, European financial markets not only offer Chinese banks a chance to internationalize but also teach them how to learn to be a player in the global financial system.

"London is the foreign exchange and capital market center and to a major degree the loans center for Europe. Other cities give local openness, which may be significant. Luxembourg, for example, is the fund center," Carmichael said.

Chris Cummings, chief executive of TheCityUK, said his team is looking to help grow the two nations' existing relationship in financial services and related professional services. "Chinese banks could be significantly more active in London and, as China is a major economy and the world's largest exporter of goods, we believe that there is huge scope to increase Chinese banks' presence in London."

Huo Rongrong, head of China and renminbi business development at HSBC Europe, the Middle East and Africa, said: "Chinese banks are an important force in the internationalization of the renminbi. Their unparalleled experience and extensive knowledge in China's onshore market warrants their natural transition into the offshore renminbi market."

Huo said HSBC's global expertise complements the Chinese banks' push for the internationalization of the renminbi.

Evan Goldstein, Deutsche Bank AG global head of renminbi services, said that the role of Chinese banks as clearing agents in Europe has helped to increase the awareness of major corporations in the use of the yuan as a trade settlement currency.

"The Chinese banks are valued members of the city of London's working group on renminbi internationalization. They have a unique perspective on business flows and transaction volumes in their capacity as offshore clearing banks in the major centers," he said.