China pide paso... II

China, UK deal pushes London as next offshore yuan centre after HK

BEIJING | Tue Oct 15, 2013 10:08am BST

(Reuters) - China will give London-based investors the right to buy up to 80 billion yuan (8.2 billion pounds) worth of mainland stocks, bonds and money market instruments, boosting the city's efforts to be the next offshore yuan trading centre after Hong Kong.

The agreement, announced by Britain and China in a joint statement on Tuesday, falls under the Renminbi Qualified Foreign Institutional Investor plan, or the RQFII.

This is the first time the RQFII has expanded outside Hong Kong to give investors more avenues to invest yuan and more incentives to hold the currency - an outcome desired by China which wants to turn the renminbi into a widely-traded currency some day.

In return for the RQFII, the British government agreed to start talks to allow Chinese banks to set up wholesale branches in the United Kingdom, the two governments said, reducing regulatory hurdles for Chinese banks expanding in Britain.

"The renminbi will now have a firmer footprint in the European market," ANZ analysts said in a note.

"With the increasing presence of Chinese banks in London, the granting of the RQFII license will strengthen and widen the platform for London to develop the offshore RMB (renminbi) bond market."

Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong said the amount granted under RQFII was substantial, underlining London as an important partner when it comes to RMB liberalisation.

"This, together with FX swap arrangement in Europe shows that China is trying to reach more parts of the world," Cheung said.

China last week also signed a 300 billion yuan swap agreement with the European Central Bank in the second-largest of such deals to date.

Under Tuesday's agreement, London and Beijing will also allow the yuan to be traded against sterling directly, as opposed to going through the dollar, thereby markedly reducing tras*action costs.

A handful of countries including Singapore, Frankfurt, Taiwan and Kenya are vying for Beijing's approval to be a designated centre for clearing yuan trades outside of China in the hope of offering what may be a lucrative financial service. But Chinese analysts have said London is a natural choice given it is as a major centre for global currency trades.

Started in 2011 as a way of enticing investors to hold the yuan, the RQFII now has a global quota of 350 billion yuan, of which 134 billion yuan is utilised.

"Today we agreed the next big step in making London a major global centre for trading and now investing the Chinese currency," said UK Chancellor George Osborne, who is in Beijing.

Tuesday's agreement comes after Britain and China agreed to set up a currency swap line of up to 200 billion yuan in July in a move aimed at boosting trade and financial stability.

Trades in the yuan have ballooned in London, with import and export financing doubling to 33.6 billion pounds from 2011.

Data from financial services provider SWIFT shows London accounts for 62 percent of yuan trades outside China and Hong Kong.

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Osborne positions London as renminbi hub

October 15, 2013 9:31 am

By Lucy Hornby in Beijing

UK Chancellor George Osborne on Tuesday moved to cement London’s position as a global trading hub for the Chinese currency, announcing new investment quotas, foreign exchange trading and relaxed requirements for Chinese banks doing business in the city.

The two countries also agreed to allow direct renminbi-sterling trading in Shanghai and offshore, making the pound the fourth currency to trade directly against the renminbi, while Chinese banks will be permitted to set up branches in London.

The greater scope for financial services and a separate memorandum of understanding that opens the UK to Chinese nuclear power investment mark what both sides are billing as a new step in relations after a recent diplomatic chill.

That positions London to profit from China’s growing integration with the global economy. China has been taking steps to open its currency and gain greater prominence in the international financial system, while attempting to minimise the destabilising effects of hot money flows.

Chief among the concessions is a quota for UK-based financial institutions to invest up to Rmb80bn (£8.2bn) in Chinese securities, a move that Osborne said would help Britain’s financial firms attract China-related investment flows.

“The internationalisation of the renminbi and use of London as the pre-eminent centre outside of China and Hong Kong, all that business is a huge boon for British financial services, for Britain as a centre of global finance,” Mr Osborne told reporters at Beijing’s elegant Diaoyutai Guest House, after a morning of trade and investment talks with Ma Kai, the Chinese vice-premier.

The Rmb80bn investment quota is an expansion of the Rmb270bn Renminbi Qualified Financial Institutional Investor programme, under which foreign investors holding the renminbi can invest it in Chinese stocks, bonds and money market instruments.

Hong Kong remains the largest centre for this trade, a status it is unlikely to relinquish, said Zhu Guangyao, Chinese vice-finance minister.

China has been keen to use the RQFII scheme, along with a similar programme denominated in US dollars, to encourage more foreign involvement in the country’s equity and credit markets.

Overseas funds account for less than 2 per cent of Chinese equity markets, which have declined in recent years from an October 2007 peak. Individual institutions still need to apply for a licence to invest.

The two countries also agreed to allow direct renminbi-sterling trading in Shanghai and offshore, making the pound the fourth currency to trade directly against the Chinese currency after the US dollar, the yen and Australian dollar.

London sees about $5bn of daily renminbi trading, compared with $12bn in Hong Kong, according to HSBC.

There was no timetable given for the launch of renminbi-sterling trade.

Chinese banks received the right to open wholesale branches rather than subsidiaries in the UK, a distinction that allows them to use their parent banks’ financial standing to meet local capitalisation and reserve requirements.

Banks from other main economies already have that right, although conditions have tightened since the Icelandic banking crisis ensnared British depositors.

Mr Osborne’s visit is a prelude to a trip by Prime Minister David Cameron that is expected this year, which ***ows diplomatic rebuffs from the Chinese side after Cameron met with exiled Tibetan spiritual leader Dalai Lama, who China’s Communist rulers believe supports Tibetan independence.

China’s interest in Britain – both state and private – has continued to flow in spite of the diplomatic chill, with the UK being the fourth-largest destination for Chinese foreign investment in 2012.

“Frankly speaking, Sino-British relations were damaged because Prime Minister Cameron met with Dalai,” said Mr Zhu, referring to the Dalai Lama.

“While China clearly expressed its political stance and at the same time resolutely safeguarded its core interests, we were not willing to see Sino-British economic relations damaged.”

Nor have they been. Mr Osborne and Boris Johnson, London’s mayor who is also touring China this week, have both touted Chinese investment into British property projects such as a logistics, warehousing, shopping and business park next to Manchester airport, valued at £800m.

The airport is pinning its plans on the prospect of increased traffic from Asia, a hope bolstered by the British decision to relax visa procedures for Chinese tourists and business travellers.

The nuclear accord, which welcomes investment by Chinese nuclear companies without specifying which one, lays the ground for China General Nuclear Power Corp to enter the Hinkley Point nuclear power project alongside France’s EdF, its long-term partner in China.

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UK opens doors to Chinese banks with special terms for lenders

October 14, 2013 10:00 pm

By George Parker, Sam Fleming and Patrick Jenkins

George Osborne will on Tuesday roll out the red carpet for Chinese banks looking to expand in London, offering to break down regulatory barriers in a bid to reinforce the City’s position as a global renminbi hub.

In a major diplomatic initiative, the chancellor is expected to offer the prospect of special terms to China’s state-owned banks as part of his “personal mission” to make London a significant Chinese offshore banking centre.

The chancellor signalled his intent on Monday in Beijing, when he said: “A great nation like China should have a global currency.” China, he said, should seek to develop the renminbi “through the international centre of finance: London”.

The City of London is already the world’s dominant centre outside China and Hong Kong for renminbi foreign exchange trading, which amounted to a daily $5.3bn at the last count six months ago, according to the Bank for International Settlements.

Mr Osborne’s initiative to expand China’s influence in the City, set to be launched on Tuesday, after talks with Chinese vice-premier Ma Kai, responds to longstanding complaints from Beijing that regulators in London were making it hard for Chinese banks to expand.

China’s three biggest banks have set up their European headquarters in Luxembourg in protest.

But Mr Osborne will announce that the UK’s Prudential Regulation Authority will offer discussions with leading Chinese banks with a view to letting them run wholesale operations through branches in London, a potentially significant breakthrough.

Currently, at the behest of the PRA, Chinese banks in London operate largely as subsidiaries and are treated the same way as local banks – with tight standards on tras*parency, capital cushions and liquidity buffers.

However, if state-owned banks such as Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China were to operate through branches, they would have access to the vast resources of their main operations in Beijing and would be largely subject to Chinese regulation. Branches are subject to lighter supervision by the PRA.

Mr Osborne’s offer risks irritating other international banks in the City, where “subsidiarisation” has increasingly become the norm, as British regulators attempt to exert greater control over foreign-owned banks in an attempt to make the financial system safer.

But the chancellor, on an extended visit to China, believes the gesture will be seen as proof that Britain is prepared to do whatever it takes to attract Chinese investment and business.

On Monday he announced a simplification of visa procedures for Chinese tourists planning to come to Europe, while he also hopes to use his trip to confirm Chinese investments in infrastructure projects and nuclear power.

However, Mr Osborne’s belief that the renminbi will become a major global economy is behind Tuesday’s gambit, a move which he hopes will make London “a home of Chinese banks, Chinese bonds and Chinese finance”.

He said on Monday that 62 per cent of renminbi payments outside mainland China and Hong Kong already took place in London, but he wants to build on that trade. A large proportion of trading is dominated by UK-based banks HSBC and Standard Chartered through their offices in Hong Kong.

But no bank outside Asia yet has clearing authorisation, meaning that renminbi tras*actions ultimately have to be routed back to China. Bankers said a Chinese bank was now being lined up for UK authorisation, plugging a key gap in London’s armoury.

Mr Osborne will claim that an expansion of Chinese banks in Britain would be good for the UK, because they would help to support the expansion of Chinese business and investments.

Of the five Chinese banks hoping to operate branches in London – ICBC, CCB, ABC, Bank of Communications and Bank of China – only the last operates largely as a branch in London, dating back to the early part of the 20th century.

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China’s Biggest Reserves Jump Since 2011 Shows Inflow
By Bloomberg News - 2013-10-15T02:15:37Z

China’s foreign-exchange reserves rose last quarter by the most in more than two years, a sign the government’s efforts to protect growth attracted money even as developing nations from India to Indonesia saw capital exit.

Reserves were a record $3.66 trillion at the end of September, the People’s Bank of China said yesterday in Beijing, up from $3.5 trillion in June. The median projection was $3.52 trillion in a Bloomberg News survey of seven economists.

The data suggest Premier Li Keqiang’s efforts to boost expansion stoked capital inflows while emerging markets suffered outflows on concern the U.S. Federal Reserve would taper monetary stimulus. The yuan strengthened by the least in five quarters in the July-September period, signaling central bank intervention to slow gains in the currency.

“The foreign-exchange data probably reflects China’s safe-haven status and suggests hot money came into the country during the period of market turmoil,” said Timothy Condon, ING Groep NV head of Asia research in Singapore.

The yuan advanced to the strongest level since the government unified official and market exchange rates at the end of 1993, rising 0.02 percent to 6.1067 per dollar as of 9:36 a.m. in Shanghai. The currency strengthened 0.2 percent yesterday. It gained about 0.3 percent in the third quarter, ***owing a 1.2 percent increase in the previous period.

Growth Pickup

The world’s second-biggest economy probably grew 7.8 percent last quarter, up from 7.5 percent in the April-June period, based on the median estimate in a Bloomberg News survey ahead of a report due Oct. 18. Previous reports showed exports unexpectedly fell in September and two manufacturing gauges rose less than estimated, indicating limits on a recovery seen in July and August data.

The central bank didn’t give an explanation for the increase in reserves. It didn’t immediately respond to a faxed request for comment from Bloomberg News.

“The market is saying that China data is improving,” said Thomas Harr, head of Asia local-markets currency and rates strategy at Standard Chartered Plc in Singapore. “In the very short term the cyclical data has started to improve and that is what is supporting the currency and thereby also inflows into the currency.”

Zhou Hao, Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said the surge in reserves reflects capital inflows and the central bank’s intervention as it bought “intensively” to prevent the yuan from strengthening.

Shadow Finance

New yuan loans topped estimates in the central bank data while the broadest measure of credit fell from August, as authorities try to support expansion without boosting shadow finance. Money-supply growth slowed in September, with M2, the broadest gauge, rising 14.2 percent from a year earlier.

Aggregate financing was 1.4 trillion yuan ($230 billion) in September, compared with 1.65 trillion yuan a year earlier. New yuan loans from banks were 787 billion yuan, exceeding the 675 billion yuan median estimate of economists. They accounted for 56 percent of aggregate financing, compared with about 45 percent in August and 87 percent in July, according to previously released data.

“The PBOC may have implicitly expanded new loan quotas for banks as the authorities try to rein in the shadow banking sector,” Chang Jian, China economist at Barclays Plc in Hong Kong, said in a report.

Chinese banks have advanced about 1.3 trillion yuan of mortgage loans in the first eight months compared with 300 billion yuan in the first half of 2012, Lian Ping, Shanghai-based chief economist at Bank of Communications Co., said last week.

Loan Quotas

Banks are running out of quotas to offer more mortgage loans in the rest of the year and without financing support, home prices are unlikely to gain significantly, Lian said.

Elsewhere today in the Asia-Pacific region, Sri Lanka’s central bank unexpectedly cut benchmark interest rates by a half percentage-point to boost growth amid what it said were “concerns regarding the global economic recovery.” Japan releases final figures on August industrial production.

Europe will see reports on inflation in France and the U.K., while in the U.S., the Federal Reserve Bank of New York provides an index on manufacturing in the New York region.

China’s foreign-exchange reserves will probably keep growing for another quarter before outflows resume on a tapering of bond-buying by the Fed, said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. The holdings are rising in part because Chinese companies are selling their dollars for yuan, Liu said.

“China’s stable currency, large current account surplus and robust financial conditions could make China a defensive place when some other emerging markets were hit by a possible U.S. QE tapering,” Bank of America Corp. economists including Lu Ting, head of Greater China economics, and Zhi Xiaojia said in a note, referring to quantitative easing.

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