Speech by the Commercial Secretary to the Treasury, Lord Sassoon, London Hong Kong RMB conference

The Future of RMB in the Global Financial Markets: The potential of the London and Hong Kong Offshore RMB Centres.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Lord Sassoon of Ashley Park

The Future of RMB in the Global Financial Markets: The potential of the London and Hong Kong Offshore RMB Centres.

Thank you Sir David for your welcome and for all you continue to do for UK-China business.

I am delighted to be here today to open this conference discussing the future of the Chinese currency, the RMB, in global financial markets.

And I am particularly pleased to have the opportunity to discuss the very important ongoing collaboration between Hong Kong and London in this key area. 

This growth is important for the UK.

We will continue to ensure that the UK - and London in particular - is one of the best places in the world to do business.

Cutting Corporation Tax to the lowest rate in the G7 by 2014.  And cutting the top rate of income tax to 45 per cent.

Seeing £14.5 billion invested in London’s Cross Rail project, one of the largest engineering projects in Europe to improve the City’s infrastructure. 

And we are achieving results. Thanks in part to the business focused approach of this Government, the UK has re-entered the top ten retained its position as the top Global Financial Centre. 

Earlier this year, AON the world’s largest risk management company, became the first ever S&P 500 company to move its headquarters to London.

A major part of this Government’s growth strategy is focused on supporting our export market and forging critical links with our major global partners - China, of course, being key.

While much of Europe is grappling with the eurozone crisis, we in the UK can spend much more of our time and focus on the global opportunities including with Hong Kong and China.

Now many of you will be familiar with the context and progress of the RMB project but I think it is worth restating.

The UK is already the number two destination for Chinese Foreign Direct Investment in the EU and China is the UK’s largest goods export market outside the US and EU.

Together we are working hard to meet our target of $100 billion in bilateral UK-China trade by 2015 as part of our ambition to double annual UK worldwide exports to £1 trillion by 2020. 

And of course, through our respective financial services industries, we have a wealth of opportunities to expand trade in services and support real economic growth. 

China has grown 10 per cent a year for the last 30 years, and in 2010 their share of world trade stood at 11 per cent.  However, for much of this time Chinese trade has relied overwhelmingly on the US dollar. 

The wider international use of the RMB is an important development for China. 

Redenominating trade into RMB supports the Chinese real economy through mitigating foreign exchange risk, increasing trade volumes and reducing liquidity risk - like that faced in 2008.

Two years ago the proportion of China’s trade denominated in RMB was one per cent.  Now it is 11 per cent; a rapid expansion, but one that leaves scope for very substantial growth in the international use of the RMB in the coming years. 

Extending the international RMB market beyond greater China will be crucial to this growth.

So when the Chancellor of the Exchequer and I met with Vice Premier Wang Qishan last September, both sides agreed to support the private sector interest in developing the international RMB market in London.

London is perfectly placed to be the “Western Hub” for the international RMB market. The UK accounts for 37 per cent of global currency trading, more than twice that of the US and of the rest of the EU, making London a natural choice for an international RMB centre.

Developing such a role will clearly be important to the future of the UK’s financial services industry as the RMB develops into a global currency. 

But its importance goes much further than this.  Using the RMB in trade with China can increase the price competitiveness of UK and European exporters and help them expand volumes.

But firms will only be able to do this if they can access a full range of RMB products and services.  So the development of these services in London will be of significant benefit to our real economy too.

But in taking on the role as Western RMB Hub, London is not in competition with Hong Kong, but rather the ideal complement.

UK exports of goods to Hong Kong topped £5 billion for the first time in 2011.  And overall exports increased by 20%, for the second year in a row. 

Hong Kong is now home to nearly half of all UK investment in Asia, at approaching £30 billion.

So from the start, that is the basis on which the Chancellor and I discussed the issue with the Hong Kong Chief Executive and the Chief Executive of the Hong Kong Monetary Authority. 

And this is why it was alongside the Chief Executive of the HKMA that the Chancellor launched the private sector London-Hong Kong International RMB Forum in January.

Last month, senior representatives from leading global financial intermediaries, corporates, investors and market infrastructure institutions met in Hong Kong for the first of these fora, facilitated by officials from HM Treasury and the HKMA. 
It represented a major milestone in the collaboration between London and Hong Kong, establishing a common platform for the international RMB market. 

The participating banks agreed on six key areas of collaboration on the development of the international RMB market:

  1. Increased support for companies wishing to trade in RMB;
  2. A comprehensive marketing campaign for RMB products;
  3. Smoothing the flow of RMB liquidity between Hong Kong and London;
  4. Addressing exchange settlement risk in the international RMB market;
  5. Providing direct foreign exchange quotes between RMB and non-dollar currencies; and
  6. Improving pricing benchmarks and dealing services in RMB instruments.

While this is an important beginning, there is still much work to be done. But I am confident that London and Hong Kong will continue to work together very effectively. 

Both centres can bring a great deal to the partnership as they carry out the important work programme that the private sector has set itself before the next forum in London this Autumn.

Our collaboration gives institutions in London and Hong Kong the official platform on which to build this critically important market.

In Hong Kong, financial institutions continue to play a pioneering role and in London I have been hugely encouraged by the commitment to the task from leading market participants, as developments in the London market come thick and fast. 

In April, the Chancellor launched The City of London initiative for London as a centre for international RMB business which has the aim of considering practical measures to support the development of London as an RMB centre.

RMB deposits in London have already reached 109 billion RMB - roughly $17billion - of which 35 billion RMB are customer deposits.

The annual trading volume in offshore RMB bonds had reached 28 billion RMB and London already represents 26 per cent of the global offshore RMB spot foreign exchange market - a market which grew by over 80 per cent last year.

And the specific actions of key financial institutions coinciding with our initiative  - in London and in Beijing - have reaffirmed the success of this project.

HSBC has launched a landmark 2 billion RMB bond issue, the first such issue outside of Chinese sovereign territory.  It is a testament to the depth of London’s markets that this bond was targeted at 1bn RMB but was oversubscribed four times over.

Standard Chartered has reached 1 billion RMB in their London Euro Commercial Paper programme, creating a liquidity pool to facilitate RMB-denominated trade and providing a new instrument for investors. 

HSBC launched six new RMB currency pairs, including Sterling-CNH, which will further facilitate market liquidity across key geographic regions. 

And China’s largest bank, ICBC, successfully issued a 100 million RMB Certificate of Deposit out of its London subsidiary, the first such product issued by a Chinese bank in the London market.

It is natural that as Chinese banks like ICBC look westwards, they choose London as the hub for RMB in the west, given London’s pre-eminence as a financial centre. 

And we can also see the progress on RMB through wider UK interaction with Chinese financial institutions: CIC’s investment in Thames Water, so it is very good that we have Professor Lau, CIC International’s chairman, with us today; the opening of SAFE’s investment arm here in London; and an increasing number of official and routine visits from Chinese entities point. All of these developments show the wide scope for opportunities across the financial services spectrum which we should welcome with open arms.

While this is an important beginning, there is still much work to be done, but I’m confident that London and Hong Kong will continue to work effectively together, deepening our expertise on the Chinese market, applying our skills to meet the needs of this market and carrying out the important work programme that the private sector has set itself before the next Forum this Autumn.

I am sorry that I can’t stay to listen to the rest of the conference but I will read the record with great interest. I wish you a productive day.

Thank you.

Published 14 June 2012