Good morning ladies and gentlemen.
Andrew (Tilton) spoke earlier this morning about the “new normal” that the Chinese economy has entered. But even with lower growth expectations, there remain major developments in China that will create new opportunities for global investors. The UK has plenty to offer on each of these.
Before we get going – a personal reflection. Since I first worked on China at the British Embassy in Beijing in 1997, post the Hong Kong handover, the Chinese economy was facing multiple headwinds from the Asian Financial Crisis. Against these challenges in the global economy Jiang Zemin announced plans to drastically overhaul the SOE sector in a programme which included privatisation at the 15th National People’s Congress.
It is with these types of market-driven reforms that the Chinese economy transformed itself into the world’s second largest economy when I returned as British Consul General to Hong Kong in 2012. In 2016 the Chinese economy, despite challenges, now accounts for around 16% of world GDP and contributes about one third of GDP growth in the global economy. It is always worth reminding ourselves of the speed and dramatic nature of this transformation. The next decade may well prove as transformational in terms of pace and nature of economic developments in China. Developments I want to talk about today.
The ascent of the Chinese economy has led to the rapid growth in the use of its currency, the Renminbi, which SWIFT tell us is now the fifth most widely used currency for payments.
From allowing HK residents to set up RMB accounts in 2004, to the QFII, RQFII to the launch of the Stock Connect and Mutual Recognition of Funds in HK, the pace of capital account liberalisation in China has been fierce.
The internationalisation of the RMB took a big step late last year when it was accepted into the IMF’s Special Drawing Rights basket. SDR inclusion could bring around USD$1 trillion worth of capital flows into China over the next five years.
March this year saw the Chinese interbank bond market become open to eligible foreign investors, allowing foreign asset managers access to more than 90% of the overall Chinese bond market, the third largest in the world. This will attract even more fund inflow.
So China and the RMB are increasingly important actors in the global financial system.
So how can global investors make the most out of the opportunities from the internationalisation of the RMB? What trends to focus on?
Yes the RMB internationalisation landscape is different to pre August last year. Two-way volatility in the exchange rate is given. A longer view on RMB investments is needed.
We assess there are four developments in China promising exciting prospects for you, the asset management community. Happily also they coincide with the themes you are addressing in this Forum.
- the growing wealth and savings of the middle class
- the Belt and Road initiative
- Financial technology or Fintech
- Green Finance
Firstly, the growing middle class in China has already transformed the Chinese retail market, driven by decades of sustained economic growth, rising wages and mass urbanisation. And they are also currently changing the landscape of the international retail market.
Despite their spending prowess, Chinese households still save up to 40% of their income. A disproportionately large amount compared to other economies in similar stages of development.
This has created a sizeable pool of savings, which due to capital controls, are restricted to investing in the Chinese stock and real estate markets. But the events of last summer have shown us what happens when too much money chases a limited amount of investment opportunities.
In order to avoid future episodes like this, the Chinese authorities will have to further open up to foreign asset managers to enable Chinese retail investors to diversify away from domestic markets and to offer them more savings and insurance products. We have already seen some progress on this front.
The State Council has recently released guidelines on how foreign asset managers can tap into a larger slice of the Chinese National Social Security Fund (NSSF), further reforms are expected by year end. This move lays the groundwork for more of the RMB1.5tr (USD$231bn) state pension to be directed into overseas markets - a sizeable opportunity.
The Mutual Recognition of Funds between China and HK has expanded the range of products and investment managers that Chinese retail investors can choose from.
It is the aim of the UK government to establish a similar mutual recognition scheme between the UK and China in the coming years.
Hong Kong has traditionally served as the platform to link Chinese and international investors. As the Chinese capital cake grows, the icing on the cake in the form of investments overseas, other markets will need to help – including of course the UK.
The UK is the leading asset management centre in Europe, with around 37% of all European assets under management (AUM) managed from the UK. More than the combined AUMs of Germany, France and Italy, the next three largest asset management jurisdictions in Europe.
The sector is international. 40% of the £5.5 trillion of assets managed by Investment Association members in the UK comes from overseas clients. We have been working with China to strengthen the UK’s asset management capabilities for Chinese investment managers.
The UK is the leading Western offshore RMB hub. We are proud of the initiatives we have agreed with China to achieve this. These include a number of milestones in RMB internationalisation:
- we are the first G7 country to agree a swap line with China
- we are the first country outside Greater China to be awarded a RQFII quota to be able to invest directly into the Chinese markets
- we are the first Western economy to issue an RMB bond outside China
- we are the first country outside of China where the People’s Bank of China has issued short term central bank RMB bonds
- soon we will be the first country outside Greater China to have the Chinese government issue a sovereign RMB bond
These milestones have translated into substantial commercial opportunities as Chinese managers such as the likes of Haitong Asset Management, GF International Asset Management, CCBI and ICBC have all established a presence in the UK.
To quote the Chancellor of the Exchequer, “the UK is not just open for investment management business, it is actively seeking it”. And I hope all of you here can be a part of it.
Belt and Road is another major new opportunity for the asset management community. It is an initiative that reflects the fact that China is now the third-largest foreign direct investor in the world. Outward direct investments (ODI) by China to the rest of the world amounted to RMB 758.5 billion in 2014, a 63% rise over the previous five years.
With Belt and Road and the formation of the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund, expect to see Chinese infrastructure investment expand.
The UK was the first major western country to become a founding member of the AIIB.
We have an ‘Infrastructure Alliance’ with China in order to foster operation between our respective infrastructure investment plans.
The UK’s own National Infrastructure Delivery Plan which set out a £483 billion pipeline of infrastructure projects, ranging from transport to clean energy that is ready for private sector involvement. (High Speed 3 (HS3) rail link between Leeds and Manchester as well as the Crossrail 2 project to connect South-West and North-East London).
The infrastructure alliance is about more than fostering investment in our home markets. It is about the UK serving as the hub for the immense infrastructure financing opportunities that lie along the Belt and Road. Opportunities, for which the funding needs of infrastructure development in emerging economies in Asia alone, will be around USD$8 trillion according to estimates from the Asian Development Bank.
The UK aims to be the vital partner for Chinese infrastructure investments globally.
The third new development I want to highlight is Fintech.
The Fintech sector in China represents one of the world’s biggest opportunities in terms of market development. Unlike in many other countries, Fintech in China has the unique prospect of shaping the development of China’s financial market infrastructure by embracing new technological changes, as opposed to having to adapt to existing systems.
The rest of this week’s programme may inform you on how robo-advisors and blockchain technology can disrupt existing asset management practices.
I’d rather tell you what the UK is doing on the Fintech front and how you can be part of this exciting new development.
The UK is the world’s leading Fintech centre according to a recent survey by EY. This is due to London’s position as a global financial centre – with a large and technologically sophisticated customer base which has created a fertile ecosystem for Fintech in the UK.
Unlike some other leading Fintech hubs like California or one much closer to home – the UK has supportive regulatory approach alongside the availability of a global investor base.
The UK regulator, the Financial Conduct Authority (FCA) has supported the development of the Fintech industry with a simple, transparent and industry-driven regulatory regime.
FCA initiatives like Project Innovate was amongst the first major Fintech hubs to provide a dedicated regulatory point of contact for Fintech firms. This approach has now been adopted around the world, including here in HK where the SFC and HKMA have recently set up Fintech contact and facilitation points.
These factors combined create an ecosystem which is conducive in matching Fintech firms seeking investment with a global pool of investors.
Cocoon Networks and Nest VC have established a presence in the UK, becoming the first Chinese and HK owned companies to establish a start-up ecosystem and venture-capital fund in London. We have also seen Alipay announce that they are going to launch a mobile payment platform in the UK, and use it as a base to expand across Europe.
The UK government has also recently announced the development of “Fintech bridges” which aim to help UK Fintech firms expand internationally, as well as attracting international Fintech companies and investors to the UK.
And with the rapid growth of the Fintech sector in China set to continue, we are likely to see even more Chinese Fintech firms and investors expand to the UK.
Finally – the last major development is Green Finance. A topic that features prominently under China’s Presidency of the G20 this year. Indeed the People’s Bank of China and the Bank of England are co-chairing a Green Finance Study Group.
The UK and China, together with the world leaders gathered in Paris last December, acknowledge the importance of green finance and a sustainable financial system.
That is why we have seen the G20-led Financial Stability Board (FSB) set up a new Task Force on Climate-related Financial Disclosures (TCFD) to help financial market participants understand their climate-related risks.
The Chinese government have also taken an active role on disclosures, including the People’s Bank of China recently issuing “Green Financial Bond Guidelines” to set out the procedures and requirements for green bond issuers.
The green bond market is burgeoning. Experts estimate there will soon be a USD$140 billion-a-year market.
London is the third largest green bond market in the world, with 9% of total global issuance. 21% of the issuances were in non- sterling currencies.
In October 2015 Agricultural Bank of China issued a USD$1bn green bond here in London, the first ever green bond by a Chinese bank. It was a huge success, with the RMB tranche eight times over-subscribed.
Before that, the International Finance Corporation (IFC) issued a RMB 500 million green bond, the first green bond issued by a multilateral institution in offshore Chinese markets.
The City of London aims to further London’s global leading role in green finance and it recently launched the Green Finance Initiative aiming to support the sector’s development. 2016 has been marked as the Year of Green Finance. And I hope we can all play our part.
To conclude – a word on London’s role as the leading Western offshore RMB centre in the internationalisation of the RMB. For it is financial centres that build the bridges of connectivity between China and the global markets.
The UK government’s approach on RMB issues is clear: the UK Government believes the rise of the RMB is one of the most important financial market developments of the 21st Century. This is why we have established an ongoing dialogue with the Chinese government to work together to internationalise the RMB.
You will have seen the reports of President Xi’s State Visit to the UK. And also Chancellor George Osborne’s Economic and Financial Dialogue in Beijing last autumn. These two high-level visits saw several significant announcements of interest to the asset management community:
- feasibility study on a London-Shanghai Stock Connect
- establishment of a working group on mutual fund recognition between UK and China
- the expansion of GF international to London, the first wholly Chinese owned asset manager in Europe
- Aberdeen Asset Management (Shanghai)’s license to operate in China as a wholly foreign-owned enterprise, and its application to be registered with the Asset Management Association of China
These bridges between UK and China will continue to be developed in Autumn this year, where the annual UK-China Economic and Financial Dialogue promises to deliver even more integration between these two markets.
I must point out - the success of the UK as the leading Western offshore RMB centre would not be possible without our relationship with Hong Kong, the largest offshore RMB centre in the world. I like to think that Hong Kong benefits also from cooperation with the UK.
Cooperation between these two global financial centres has been key and is supported by the annual London-Hong Kong RMB Forum, facilitated by HM Treasury and the Hong Kong Monetary Authority.
And that is the story of the RMB, closer cross-government cooperation to build the bridges to internationalise the RMB, closer cooperation across the asset management industry and their partners.
An increasing dialogue between China and the world.
Together we can all jointly reap the benefits of RMB internationalisation.