Ladies, gentlemen, distinguished guests,
Good afternoon – I’m delighted to be speaking here today, and I want to thank Brian Schwieger for that introduction.
UK and EU
My plan today was to talk about the UK, China and Hong Kong. But I know there’s also another issue you’ll be interested in. So first, let’s talk about the UK and Europe.
On Thursday 23 June, the British people voted to leave the European Union. This was a major democratic exercise, and Prime Minister David Cameron has made clear that the will of British voters must be respected and implemented.
As a result, the UK Government is now preparing for a negotiation to exit the EU. That negotiation will begin under a new Prime Minister, who is expected to take office before October.
A change of this magnitude poses very real challenges for the British economy. But as the Chancellor of the Exchequer George Osborne said earlier this week, “our economy is about as strong as it could be to confront the challenge our country now faces”.
The Treasury, the Bank of England, and the Financial Conduct Authority have spent the last few months putting in place robust contingency plans for the immediate financial aftermath in the event of this result.
This has included pre-arranged swap lines to allow the Bank of England to lend in foreign currency if needed; and an announcement by the Governor of the Bank of England that the Bank is ready to provide £250 billion of funds, through its normal facilities, to continue to support banks and the smooth functioning of markets.
Looking to the future, the UK will negotiate a new relationship with the EU. But whatever happens, Britain will continue to be an influential and outward looking power on the world stage, working with partners for security and prosperity. The UK remains committed to an open, rules-based international system; we are a Permanent Member of the United Nations Security Council and a member of the G7, G20 and NATO.
The UK Government intends to put in place the strongest possible economic links with our European neighbours as well as our trading partners around the world.
And we remain totally committed to continuing to strengthen the UK’s relations with China and Hong Kong.
So on to the rest of the speech…
The changes currently taking place in the Chinese economy and the opening of its financial markets are profound.
As China’s financial markets continue to liberalise, and as its currency further internationalises, we believe that the UK’s interest, as one of the world’s leading financial centres, is to work jointly with China to support the internationalisation of the RMB.
As the Chancellor said last September on his visit to Shanghai, the UK is committed to being China’s long-term partner on its journey of economic transformation and financial reform.
And this fits very well with our long-standing and deeply valued partnership with Hong Kong. With this perspective in mind, I want to use this speech to focus on two main areas that I think will set the scene for the next panel on RMB fixed income opportunities: the UK’s bilateral financial relationship with China, and our work with China on global economic issues.
UK/China bilateral relations
The first area to emphasise is the importance of bilateral partnerships in developing the offshore RMB market.
In the world of finance, we all know that our positions are only as good as our counterparties. The UK is proud to have been chosen as China’s preferred Western partner.
The success of President Xi’s State Visit to the UK has placed our bilateral relationship on a new level.
This was the first State Visit by a Chinese President in a decade, and a truly momentous occasion. It reflected the success of the UK’s dialogue with China over the course of last year, which led to the most ambitious package of measures ever agreed between the UK and China.
These measures enable the UK to shore up its position as the leading Western hub for offshore RMB access and to build on its position as the world’s top financial centre.
In this context, I think it is worth highlighting some of the main announcements from last September’s Economic and Financial Dialogue that will be of interest to this audience:
an agreement between the People’s Bank of China and the Bank of England to expand the existing RMB swap line
plans for the China Foreign Exchange Trading System to establish a branch in London to enable CNY trading
the issuance of 5 billion RMB worth of short-term central bank notes by the Peoples Bank of China for the first time outside of China
the listing on the London Stock Exchange of the first ever sovereign RMB bond to be issued outside of China
Following these announcements, the UK Government also committed itself to supporting a feasibility study for a ‘Connect’ between London Stock Exchange and Shanghai Stock Exchange – obviously inspired by Hong Kong’s example.
And we also agreed to take forward work on the mutual recognition of funds with China – does this sound familiar to a Hong Kong audience? Again, it’s because we are learning from Hong Kong experience.
On the basis of our partnership with China, the UK was invited as the first ever “country of honour” at this year’s Lujiazui Forum, where Xavier Rolet, Chief Executive Officer of London Stock Exchange Group, also spoke about further building financial cooperation between UK and China.
In many ways it is natural to see why the UK is well-suited to facilitate this wave of Chinese financial liberalisation.
The UK accounts for 41% of global FX trading – more than anywhere else in the world. As Chinese firms look to go global, London is best placed to ensure that they have access to the FX services and hedging tools they need to manage their risks.
The UK also accounts for 15% of the outstanding value of all international bonds. This makes London the natural home for raising finance, and to date we have seen 90 RMB bonds listed on the London Stock Exchange, raising a total of 37 billion RMB.
Looking forward, the UK government aims to develop these connections further at next the UK-China Economic and Financial Dialogue which will take place in the UK in autumn.
So there are fundamental reasons why the UK’s financial markets are perfectly positioned to act as China’s leading western partner as it continues on its journey of economic transformation and financial reform.
As my earlier comments suggested, Hong Kong’s experience, and its crucial role in this area, has been of great interest to the UK.
The UK has benefited a great deal from the chance to learn from Hong Kong’s experience as the largest offshore RMB centre in the world.
Every year HM Treasury and the Hong Kong Monetary Authority jointly host the London-Hong Kong RMB Forum where a range of Hong Kong and London based banks exchange their expert views on that year’s RMB developments.
I know for a fact that this engagement has greatly helped to shape and inform the UK government’s policy decisions.
And I have been struck by the willingness of both the authorities and financial participants in Hong Kong to share their know-how in helping London develop.
This reflects the confident, open outlook of Hong Kong. Last week I listened to Financial Secretary John Tsang being quizzed by a fearsome audience of journalists and bankers, and being asked how Hong Kong could maintain its leading role in the RMB market. The Financial Secretary replied that there was a difference between internationalisation of the RMB and monopolisation of the RMB, and that monopolisation had never been Hong Kong’s goal.
I believe this is because Hong Kong understands that in order for the Chinese financial system to liberalise fully, for the RMB to internationalise fully, there needs to be cooperation across multiple countries, multiple time zones and multiple investor bases.
This is why we are so in tune on this issue: the UK government is a firm believer that the business of RMB internationalisation is most definitely not a zero sum game.
Working with China on global economic issues
And that takes me on to the second theme that I want to emphasise, which is multilateral cooperation with China on global issues.
In particular, I want to talk about how the UK has worked alongside China on two key issues: Green finance and the Belt and Road initiative.
This is an exciting year for multilateral economic diplomacy, with China taking the presidency of the G20 group of nations.
As a proactive member of the G20, the UK has been greatly encouraged by the Chinese Presidency so far and we want to continue to support it in every way possible. We’re proud to be working together on efforts to advance the G20 agenda on Green Finance, Anti-Corruption and Innovation.
The Bank of England and the People’s Bank of China are co-chairing the G20 Green Finance Study Group, with the aim of establishing how best to mobilise private investment to facilitate the green transformation of the global economy.
This work is crucial not only in accelerating the development of an important new market but also in helping to support China’s transition to a low carbon economy; and will hopefully serve as useful case study for other developing economies who are also taking more of a interest in the green agenda.
The Chinese government’s active role in the low carbon transition is reflected in the fact that Chinese green bond issuance alone is expected to reach 300 billion RMB in 2016. And London has a key role to play in raising Green financing for Chinese corporates and financial institutions.
London is currently the third largest green bond market in the world, accounting for approximately 9% of total global issuance. But what’s most impressive is that 21% of the issuances were in non-sterling currencies, with RMB being a key funding currency.
To date, there have been several landmark RMB green bond issuances in London, including a number of ‘first’s’:
a 1 billion US dollar green bond by the Agricultural Bank of China , the first ever green bond by a Chinese bank
a 500 million RMB green bond by the International Finance Corporation, the first RMB green bond issued by a multilateral institution in offshore Chinese markets
The City of London has earmarked 2016 as the Year of Green Finance and intends to make London the world leader in this area.
We will see more low carbon policy announcements between UK and China this year as we all play our part in the global effort to prevent dangerous climate change.
But the G20 is not the only institution allowing the UK and China to work together on the international stage.
The UK is proud to be the first major western economy to join the Asian Infrastructure Investment Bank (AIIB) and recognise the importance of supporting infrastructure development in central Asia and beyond and to play a role in China’s Belt and Road initiative.
This morning, Sir Danny Alexander set out the AIIB’s commitment to using infrastructure investment to drive the economic development of the region.
The Belt and Road initiative will also provide immense opportunities.
Opportunities which - for the funding needs of infrastructure development in emerging economies in Asia alone - will amount to around 8 trillion US dollars according to estimates from the Asian Development Bank.
Many of these financing deals will be focused around RMB fund-raising or fund-raising for Chinese corporates and financial institutions; areas where London has experience and expertise.
London is also well positioned to help governments and companies along the Belt and Road to access financing.
At present, there are a total of over 260 companies from the various Belt and Road countries which have used London’s markets to raise capital, much of which is complementary to their local market listing.
Most recently in April this year, the Hungarian Government issued an RMB sovereign bond in London which raised 1 billion RMB.
And in 2015, the Bank of China Hungarian branch also issued a euro-denominated bond in London, the proceeds of which were to support Belt and Road initiatives.
So, ladies, gentlemen, distinguished guests –
The mutual benefits of increasing connections between our financial markets are significant – increased access to international capital for both UK and Chinese companies, and unrivalled investment opportunities for UK and Chinese investors.
In the months and years to come, we intend to build on the enormous amount we have achieved together in recent years, as the UK develops a new relationship with Europe and builds new and stronger trading and financial relationships with our global partners.
This Forum serves as an excellent chance to hear from some real experts: those who are at the forefront of the market, and whose institutions are actively shaping the market. I look forward to hearing more about how we can work together to expand and advance the financial opportunities for the UK, China and Hong Kong.