It’s good to have the opportunity to talk about the offshore RMB market as the year of the Horse enters the final straight. What a year it’s been for RMB market, watchers and participants alike.
More horses joined the chase, as RQFII quotas were extended to a total of 11 offshore centres and the number of territories with RMB Clearing Banks grew to 12.
The offshore RMB prize pool for the runners and riders grew by 65% in 2014, driven by increased activity across all elements of the market; and as new channels for offshore and cross-border RMB emerged: the RQDII quota, cross-border RMB sweeping in the Shanghai Free Trade Zone and of course the landmark Shanghai-Hong Kong Stock Connect.
As for the RMB as a reserve currency, some analysts estimated that as many as 29 countries held RMB in their reserves by year’s end.
Continuing the racing metaphor a little longer, Hong Kong continued to be to the offshore RMB market what Joao Moreira is to the Happy Valley jockey challenge – the clear leader, too far ahead for the rest to catch. After all, in 2014 HK still captured over 60% of the offshore market.
Nonetheless, there was intense competition amongst the offshore centres, who gained ground on the leader this year. At the start of 2014 the UK looked favourite to top the chasing pack – holding 13% of the market, and being the first centre outside Greater China to secure an RMB swapline and RQFII quota. I’m pleased to tell you that the UK will end the year perhaps even a head or two further ahead of its rivals.
In any case, the horse racing analogy for the offshore RMB centres isn’t quite right – because no matter who comes first, everyone’s a winner in a growing market. We are happy to cooperate with other offshore centres to develop the market; and our first and most fruitful partnership on the RMB has been with Hong Kong. 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…collaboration with Hong Kong”.
In all seriousness, my point is this: the UK Government believes the rise of the RMB is going to be one of the most important developments in financial markets of the 21st Century. 2014 was another astonishing year in that rise, and the UK firmly cemented its place as a leading global RMB hub.
Let me tell you why.
At the heart of the UK’s success is the fact that, as part of its wider plans to maintain the UK’s competitiveness and pre-eminence as a financial centre, it has been a priority of this Government to forge a partnership with the Chinese authorities to develop this market. This began in 2011 at the UK-China Economic and Financial Dialogue when 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, and is, private sector led this political agreement was critical in laying the foundation for the market’s development.
We built on this partnership at two high-profile set piece events in 2014 – the UK-China Financial Forum in London in June, when George Osborne hosted Premier Li Keqiang in the impressive surrounding of Lancaster House. The Forum was dedicated to discussing the opportunities that China’s increasing economic and financial importance presents to both countries to generate jobs and growth, in particular through the internationalisation of China’s currency, the renminbi.
Then later in September, the Chancellor met Chinese Vice Premier Ma Kai in London to conduct the 6th Economic and Financial Dialogue.
As I mentioned already, our partnerships to push the RMB market forward extend beyond our work with the Mainland authorities. The centre of our bilateral work with Hong Kong the London-Hong Kong RMB Forum, a private-sector led forum facilitated by HKMA and HM Treasury, has been a vital plank in the UK’s RMB plans. The Forum proved its worth yet again this year, as representatives from the HK and UK from no fewer than 13 banks convened in London for a day of discussions on the progress of the offshore market in the world’s top two leading RMB centres.
We remain deeply grateful for the work our friends in the Monetary Authority and HKSAR Government put into this partnership, and are committed to further cooperation over 2015, when the Forum returns to Hong Kong.
But our cooperation does not begin and end with Hong Kong. Tomorrow will see the first Singapore-UK RMB Forum held in Singapore.
This hive of activity yielded clear and compelling policy results:
- the issuance of a UK sovereign RMB-denominated bond. Used to finance Britain’s reserves, this was the first RMB bond issued by a non-Chinese sovereign. The RMB3bn bond attracted 85 orders worth over RMB5.8bn. This signals the RMB’s potential as a reserve currency of the future
- the announcement that China Construction Bank (CCB) had been appointed as the first RMB clearing bank outside of Asia in London
- China Development Bank (CDB) announced the issuance of an RMB 2 billion bond in London, the first “quasi-sovereign” to issue beyond Greater China
- direct trading between the British and Chinese currencies was agreed for the first time
- further RQFII licenses were granted to British firms to allow them to invest directly in Chinese markets
- the approval of Renminbi denominated loan guarantees by the government’s export credit agency, UK Export Finance (UKEF)
- an agreement that the UK would be a destination for investment in China’s forthcoming RQDII scheme. RQDII – Renminbi Qualified Foreign Institutional Investor – facilitates institutional Chinese investors to invest directly in UK financial markets, allowing the RMB to flow from China to the UK
In addition, there were some striking developments on the trade and investment side of the UK’s RMB offer:
- the world’s largest bank Industrial and Construction Bank of China (ICBC) was granted a license to open a UK bank branch: the first Chinese bank to open a UK branch in 50 years. It was swiftly followed by China Construction Bank (CCB) in December, and the China Development Bank plans to open a representative office in the near future
- Lloyds of London was granted a license to open a Beijing branch, giving it greater access to China’s insurance hub
- significantly for the role UK-Hong Kong links play in the internationalisation of the RMB and London’s growing role as an RMB centre, Harvest Fund Management announced its intention to be the first Chinese-parent fund company to set up in London through its Hong Kong subsidiary Harvest Global Investment
Furthermore, the RMB ecosystem outside the banking and investment management boardrooms is flourishing in the UK. It’s becoming easier than ever for shoppers to use their UnionPay cards in the UK. Big name UK brands, like Marks and Spencers, John Lewis or Harrods, and the whole of the retail paradise of Bicester village, all take payments in RMB on UnionPay.
All this goes to show that progress in the UK in this area is real. It shows to any financial institution interested in RMB activity who is looking to move beyond Greater China that there is no better choice than the UK. Just consider the facts and figures:
- London is putting its stamp on RMB FX trading – from a baseline of almost nothing three years ago, London accounted for 31% of all FX trading in RMB at the end of 2013. By the third quarter of 2014, this had risen to 42% of all offshore RMB FX trades taking place in London. This equals the share of such trades taking place in Hong Kong.
- London has become a significant RMB trade settlement centre, hosting 60% of all European cross-border RMB payments with Greater China. This is a large share of a growing pie – pure offshore international payments flows to and from the UK grew a staggering 236% from October 2013 to October 2014
- overall, this has added up to the UK’s share of the offshore RMB market ticking up from 13% in January to 14% by the end of 2014 – and that in a year when new competing offshore centres, all growing at a rapid pace, emerged in Korea, France and even the US.
And let me assure you, we will not be resting on our laurels. The UK remains ambitious that 2015 will be just as bumper a year:
- we want to explore how to make connections with London, to follow on from the Shanghai-Hong Kong Stock Connect. We are particularly excited at the prospect of RMB-denominated commodities trading / the prospect of a commodities Connect working through the London Metal Exchange
- we want to see Chinese individuals and institutions being able to invest RMB into London’s global capital markets
- and we want to see more Chinese companies setting up in the UK – which is partly what this event is all about
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. Fortunately, I have only good news to tell you on that score too: for the potential investor to the UK, the picture is bright.
The economy grew faster than any other EU country last year at around 3%, and in 2015 it is forecast to grow around 1.5 times the rate of our neighbours France and Germany. This burgeoning growth is balanced across the economy. The deficit is falling and the long-term fiscal plan is working – the UK will be in surplus by 2018/19.
On jobs, more people are in work than ever before, unemployment fell from 6.8 per cent in March 2014 to 6.0% in October 2014, and wage growth has been outstripping inflation since the start of 2014.
Rude economic health aside, the UK has long been a great prospect for investment and doing business. It is still ranked the 7th easiest country in the world to do business in by the World Bank. Corporation tax will come down to 20 per cent in just three months’ time, giving the UK the lowest rate in the G7 and joint lowest rate in the G20. This environment explains why again in 2014 China invested more in the UK than any other country in the European Union; and indeed why the UK attracted more investment from the rest of the world than any other EU nation last year.
And of course, the financial services industry continues to be vital to both the recovery and the strong investor environment. London is the world’s second best financial services centre according to the Global Financial Centres index, and the heart of global FX trading – some 41% of the world’s FX trades happen in London. The Financial services sector employs 2 million people in the UK; is estimated to generate over £200 billion (HKD 2.6 trillion) in gross added value for the UK economy; and creates a trade surplus of over £60bn (HKD 790 million) annually.
This all makes for a compelling case for investing in financial and professional services in the UK.
I imagine most of you will already be familiar with these figures and arguments. I know too that many of you work in, or advise upon, the investment and asset management sector, and you might be wondering – what does all of this positive news about the UK’s investor environment mean for me?
Well – 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. With £6.2 trillion of assets under management, the UK 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. The UK is also very open to foreign AM business: 40% of the large and medium sized AM firms in London are owned by overseas investors.
As I imagine one of our top professional service advisers will tell you shortly, the UK has many professional service providers and access to a diverse skills pool, so you can outsource as necessary and set up quickly. The UK securities and markets regulator, the FCA, is internationally renowned for its high standards of investor protection. Investors can therefore have confidence in the strength and impartiality of our regulatory system, together with the financial stability of a well-regulated G7 economy.
However, the UK offer on investment management is about more than targeting listings and offering fund management services alone.
The UK’s credentials as a centre for fund domicile have strengthened in recent years. At the end of 2013, the UK was in the top five EU centres for fund domicile with £770bn worth of funds domiciled there. What’s more, the UK outgrew those other centres in 2013, with growth in the value of UK-domiciled funds topping 10 per cent.
This growing strength has been boosted by Government support the industry. Since July 2013 the UK Investment Management Strategy has driven great improvements in the fund domicile environment in the UK. This extensive work has ensured that today, the UK is one of the most viable locations in which to domicile funds globally, not just in Europe.
The UK is 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.
As a result, not only do most funds pay no tax in the UK, they also have access to 120 Double Taxation Agreements – the largest double tax treaty network in the world – which improves investor returns and can make them the most efficient choice for firms. Furthermore, UK funds are subject to the same regulation as exist in other EU member states and are able to take advantage of the passporting and other opportunities provided under these regimes.
The Government has also been working closely with UK regulator the FCA to make the regulatory environment more responsive. In October 2013 the FCA announced significant cuts to the maximum time to approve a fund from 6 to 2 or 3 months (depending on the fund type).
In addition, 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.
In short, as an investment management hub, the UK ticks the boxes across domicile, asset management and distribution, as well as target investment allocation.
The key message for you is this: the UK is ready and able to be a one-stop shop for Chinese IM firms – and IM firms from any jurisdiction – that want to enter the European markets.
We know Chinese / HK-Chinese firms do want to make that leap. Indeed some in this room already have done. UKTI stands ready and more able than ever before to assist – Jo Hawley and Andy Burwell from our UKTI team in Hong Kong are here today, and would be happy to tell you how.
But the good news is: you don’t have to take my word for any of this!
Here today we have companies that advise financial institutions on where to make next investment and how in the form of Deloitte and Clifford Chance; a bank at the leading edge of the RMB and asset management industries in HSBC; the major UK industry body, the Investment Management Association; and even a company who has already made the jump to the UK, in Harvest Global Investment.
In the year of the goat, I wish Hong Kong will continue to lead the global offshore RMB market just like Joao Moreira on the Jockey Challenge Chart, and London will continue to lead the European market.
And so, without any further ado (or horse-based jokes), I hand back to Karthik to introduce our distinguished speakers to tell you more.