British Consul General to Hong Kong and Macao Caroline Wilson speaks at LSE's Greater China Forum about London as offshore RMB centre.
Thank you Alexander for inviting me to open the afternoon session of your Greater China Forum. I am thrilled to support the first event of this kind that the London Stock Exchange Group has held in Hong Kong; we hope to see many more.
I was delighted to be asked to speak about the role of London as an offshore RMB hub for three reasons. Right time, right place (HK), right Consul General (UK).
The first is how timely LSEG’s renewed focus on China’s capital markets is. China’s capital account opening is developing at speed: whether in the number and size of avenues for capital flow in and out of China, the new markets such as mutual funds, or the huge potential of the Shanghai Free Trade Zone, and others across the country.
The global offshore RMB market grew by 80 per cent over 2013, 9.5 per cent in March 2014 alone; yet the total offshore pool of RMB is only 1 per cent of the total on and off shore liquidity pool and only 18 per cent of China’s trade is denominated in RMB.
So not only is this market thriving, but its potential remains huge. There could not be a better time to start thinking about how to harness these flows of capital.
The second reason is that Hong Kong is the right location for this conference. Hong Kong has been pivotal in developing the offshore RMB market. It enjoys all the advantages of being a trusted international market place and global financial centre as well being part of the PR of China. Hong Kong‘s position is unique.
2013 was another remarkable year for the RMB market here: the RMB deposit base broke the symbolic RMB 1 trillion barrier, if you include Certificates of Deposit. Today, Hong Kong holds a 2/3 share of the whole global offshore RMB market.
Hong Kong remains at the cutting edge of this market and the favoured partner for Beijing. Proof of this came with last year’s announcement of mutual recognition of funds and April’s on Shanghai Hong Kong Stock Connect, giving global market access to onshore Chinese mutual funds market and the A shares market…through Hong Kong.
So Hong Kong is truly the springboard for China’s financial institutions looking to access international financial markets.
And thirdly, I am delighted to have this opportunity to speak about London as an RMB hub because not only does London have a great story to tell, but because this is a priority for the UK Government.
I recently heard Chancellor George Osborne outline his top international priorities. Of which the importance of trade and investment with China, and London’s status as an RMB hub to the UK’s prosperity, featured prominently. The leaps London has made have been no accident – they are a result of deliberate Government policy. And this progress has been made in partnership with an enterprising private sector, many of whom are represented in this room.
So, what has this policy on the RMB delivered? Let us look at the major developments in this market in London over the last few years.
At the UK-China Economic and Financial Dialogue in 2011 the Chancellor, George Osborne, and Vice Premier Wang Qishan agreed to support the development of the offshore RMB market in London.
Although both the UK and China believe the development of the offshore RMB market should be private sector led, this political agreement was critical in laying the foundation for the market’s development.
Cooperation between the two governments is focused on building confidence, addressing obstacles to the market’s development, and putting in place the right regulatory frameworks.
Since this political agreement, the RMB market in London has grown exponentially. There has been a dramatic rise in RMB foreign exchange and trade finance volumes in London in the last few years.
2013 was a landmark year for the London RMB market:
- A currency swap agreement between the central banks of UK and China – the first G7 country to do so
The UK became the first country beyond Greater China to receive an RQFII quota, following in Hong Kong’s footsteps and allowing UK firms to invest directly RMB in Chinese financial markets
Chinese banks for the first time can apply to set up wholesale branches in the UK
- China and the UK agreed to support RMB clearing and settlement arrangements in London, and we expect a clearing bank to appointed very soon
So 2014 looks like it will be just as exciting for London as a RMB hub, THE western hub. It began with three successes:
British asset manager Ashmore became the first firm outside of Greater China to receive an RQFII license and quota worth RMB3 billion
Bank of China issued London’s largest-ever Renminbi bond (RMB2.5 billion). Just two months after ICBC (the world’s largest bank) issued a RMB2 billion bond in London. Now three of China’s “big four” banks have issued Renminbi bonds in the UK
And finally, in a coup for our hosts – the London Stock Exchange, January saw the launch of a Chinese exchange traded fund by a partnership of Chinese and UK IM firms CSOP and Source
This was the first in Europe to track China’s mainland exchanges (so-called “A-Shares”) normally only accessible within China. In February another UK/Chinese partnership – E Fund and ETF Securities – launched a similar fund. Both trailblazing Chinese firms are represented here today.
Beyond all of these advances in the financial sector, the UK is becoming a much more RMB friendly place.
It’s becoming easier than ever for shoppers to use their UnionPay cards in the UK. Big name UK brands you can see here, like Marks and Spencers or Harrods, and the whole of the retail paradise of Bicester village, all take payments in RMB on UnionPay.
All of this sets the scene for the UK-China Financial Forum, which the Chancellor announced during his trip here in February. This will take place in 9 days’ time, on 18 June, in Lancaster House in London. It will bring together key decision makers from UK and China, and we hope that it will support new developments on RMB.
The UK will be looking to build further on these advances at the next Economic and Financial Dialogue with China, due to be held during the autumn in London. We will look at new ways to grow the offshore market, and for new ways for RMB to flow between the onshore and offshore markets.
The dividends from all of this activity are clear. Almost two thirds of all RMB payments outside of China and Hong Kong now take place in London. London’s share of the global RMB market has jumped from 9 per cent at the end of 2012 to 15 per cent by April of this year. Given the pace of growth in the RMB market overall, this means the volume of RMB activity taking place in London grew by around 150 per cent during 2013.
Another key date in the RMB diary is the next London-Hong Kong RMB Forum, due to be held in November in London. There, 13 banks, corporate participants, HM Treasury, HKMA and the City of London will build on the success of the first three forums, focusing on corporate education, enhancing the RMB services that banks can offer and more innovative RMB products.
While on the topic of the Forum, I must add how critical our partners in the Hong Kong Government and HKMA have been in this process. As the Chancellor said when he was here, “London’s position as the Western centre of RMB trading has been greatly strengthened as a result of this collaboration with Hong Kong”. We remain grateful for the work Hong Kong puts into this partnership, and are committed to further close cooperation over 2014.
So London’s credentials as an RMB hub are clear.
But I know that there is much more to making a decision to list, invest or channel capital from China and Hong Kong to London than its status as an RMB hub alone.
For the potential investor to the UK, the picture is bright. The economy is expected to grow faster than any other G7 country this year, the deficit is falling and more people are in work than ever before. The burgeoning growth is balanced across the economy, with all three major sectors of the economy – manufacturing , services and construction, growing on a year earlier.
The long-term fiscal plan is working – the OBR now expect debt to start falling in 2016/17 – a year earlier than they had predicted last year. And the government is still on course to meet its fiscal mandate of a balance in the structural deficit in the next five years
Unemployment fell from 7.2 per cent at the turn of the year to 6.8 per cent in March. Wage growth began to outstrip inflation at the start of this year.
The upshot of all this is that the UK’s Office for Budget Responsibility boosted its forecast for UK growth in 2014 to 2.7 per cent in February. The IMF disagreed…its most recent forecast pitched UK growth higher (!) for the year at 2.9 per cent. This means that UK is forecast to grow faster than Germany, and almost three times faster than our French neighbours.
Economic health aside, the UK has long been a great prospect for investment and doing business. It’s ranked the 7th easiest country in the world to do business in by the World Bank. Corporation tax came down again to 21 per cent this year, on the way to 20 per cent in 2015 – the lowest rate in the G7 and joint lowest rate in the G20.
This environment explains why China invests more in the UK than any other country in the European Union; and why the UK attracted more investment from the rest of the world than any other EU nation last year. Indeed EY’s annual survey sees Britain move from 8th to 5th in the world ranking of countries investors regard as attractive for foreign direct investment (FDI) over the next three years – its highest-ever position. Only China, the US, India and Brazil are ahead..
And on the EU, as the Prime Minister David Cameron said, Europe faces an existential economic challenge, and it needs to change if it is to succeed in the modern world. The overriding task of the European Union today is to help secure the prosperity and the wellbeing of its citizens.
That requires a more open, outward-looking, flexible and competitive European Union. The UK wants to work with others to deliver that change, and be a positive player in a reformed EU. And we want to complete the single market so that our businesses – and those who invest in them, including from overseas – can seize the potential of the world’s largest market to expand and create jobs;
And of course, the financial services industry continues to play its part, both in the recovery and in creating a robust investor environment.
London remains the world’s top financial services centre according to the Global Financial Centres index
More than 2 million people are employed in the financial services sector across the UK, and it generates £200 billion (HKD 2.6 trillion) in gross added value for the UK economy. These services are still in demand around the world – last year, CityUK calculated that UK financial and professional services generated a trade surplus of £61bn (HKD 790 million).
London’s ongoing success is based on continuous innovation. A great example of this spirit is the leading role the LSE, which joined the UN Sustainable Stock Exchanges Initiative last week, has taken on mandatory carbon disclosure. Carbon disclosure – something we know HKEx regards as an important issue in its on-going roadmap to advance Environmental, Social and Governance disclosure – helps manage business risks, generates energy savings, attracts investors and is good for shareholders. An innovative initiative that keeps London ahead, is good for business and good for the environment – a real win, win, win.
This all makes for a compelling case for investing in financial and professional services in the UK. I know many of you will be focused on the investment and asset management industries in particular; and wondering how all of these figures and statistics apply to you.
The UK has many advantages as a hub for investment and asset management. Under EU rules fund managers can register funds in one Member State and then freely market the fund across the whole of the EU – a potential 500 million investors.
These advantages give the UK a formidable record. It has the second largest asset management industry in the world and more assets are managed out of the UK than any other place in Europe – £5.2 trillion, 36% of the European industry. We are open to foreign AM business: 40% of the large and medium sized AM firms in London are owned by overseas investors.
- The UK has many professional service providers and a diverse skills pool, you can outsource and set up quickly
- The UK securities and markets regulator, the FCA, is internationally renowned. Investors can have confidence in the strength and impartiality of our regulatory system, together with the financial stability of a well-regulated G7 economy
Specifically on RMB-related success, I have already mentioned the landmark CSOP and E Fund listings, providing access to the Chinese stock market, on the London Stock Exchange. The scope for products like these on the LSE will only grow as UK RQFII quota license holders bring RMB-denominated products to market this year.
However, if there is one key message I want you to take away today, it is this – the UK Government is more ambitious than targeting listings and offering fund management services alone.
Since July last year, under the UK Investment Management Strategy, the UK has made great strides in improving the fund domicile environment in the UK.
That has included moving towards tax neutrality for fund domicile. In response to feedback on what was deterring funds from domiciling in the UK, at Budget 2013 the Government abolished stamp duty schedule 19, and at Budget 2014 the Government abolished Stamp Duty on Exchange Traded Funds.
The Government has also been working closely with the UK regulator the FCA to make the regulatory environment more responsive. In October the FCA announced significant cuts to it authorisation times.
Something UK officials regularly hear across China when we engage with market participants is that Ireland and Luxembourg are the only places where it is viable to domicile funds in Europe; or even that the UCITS fund structure is only available in these jurisdictions.
Let me be clear about this: that is not the case.
The UK is one of the most viable locations in which to domicile funds globally, not just in Europe.
UK funds are subject to the same regulation, whether UCITS or AIFMD, as exist in other member states and are able to take advantage of the passporting and other opportunities provided under these regimes.
On tax, the UK rules are such that very few UK domiciled funds pay tax, yet they have access to the largest double tax treaty network in the world, which improves investor returns and can make them the most efficient choice for firms.
Many of the UK domiciled and managed funds are actively distributed overseas and UK based investment management expertise is seen as leading edge around the world – by a wide variety of overseas institutions, insurance and pension funds as well as sovereign wealth funds.
As an investment management hub, the UK ticks the boxes across domicile, asset management and distribution as well as target investment allocation.
The UK is the one-stop shop for Chinese IM firms – and IM firms from any jurisdiction for that matter – who want to enter European markets.
- You can open a representative office or subsidiary in the UK
- Your funds can invest into UK funds and sectoral investment opportunities
- Your funds can be domiciled in the UK
- Your funds can be serviced in the UK
- Those funds can be managed and distributed from the UK
- And those funds can be listed in the UK
To sum up,
We are delighted that the UK and London is the world’s second largest, and the Western RMB hub. The UK government with our private sector partners, and close collaboration with Beijing and Hong Kong, is committed to keeping it that way and dynamically developing the market
The UK is open for business and investment as the world’s leading financial centre
The UK is the natural partner for Chinese IM firms and financial institutions looking to access the European and global markets – we aim to entice you to the UK alongside key private sector partners like the London Stock Exchange