Speech by the Financial Secretary to the Treasury.
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Good morning and thank you for inviting me to speak here today. It’s a pleasure to speak with so many leading figures from the European and Chinese financial market, all with a deep commitment to forging stronger bonds between the two.
The UK Government has been at the very fore front of that ambition.
Four years ago, the UK and China embarked on what has proved a very fruitful Economic and Financial Dialogue, with the fifth meeting due to be held in Beijing later this year.
A continued Dialogue that is testimony to and builds upon the growing strength and deepening importance of the UK-China relationship.
The UK is already the number two destination for Chinese Foreign Direct Investment in the EU.
China is already the UK’s largest goods export market outside the US and EU, whilst the UK is the second largest EU investor in China by value.
Together we are working tirelessly to meet our target of $100bn in bilateral trade by 2015. And that as part of our ambition to double annual UK worldwide exports to £1 trillion by 2020.
Of course, through our respective financial services industries we have a wealth of opportunities for mutual UK-Chinese growth.
UK firms already account for over 20% of China’s foreign banking market…
The largest five Chinese banks already have an established UK presence. The Bank of China is celebrating its 100th anniversary this year, and for 83 of those years it has also had an established branch in the UK.
Most recently we have had the launch of the Agricultural Bank of China’s subsidiary …
As many of you will know, NAFMII [National Association of Financial Market Institutional Investors] have also recently issued a licence to HSBC to expand underwriting operations in the interbank market…
And of course our ongoing work to support the development of the international RMB market here in London.
The international RMB market that has grown rapidly in recent years.
Just under 10% of China’s trade is now denominated in RMB, up from 1% just 18 months ago.
A rapid rate of growth that reflects the success of the mainland Chinese Government’s policy of increasing the international use of the RMB, and is also a credit to the pioneering work of the Hong Kong authorities to promote the market.
We believe that London provides the ideal complement to Hong Kong, drawing on our world leading expertise, competitive business environment, market depth and European time zone to become the Western hub for international RMB market.
London is the logical place to expand and help deepen the RMB market.
But this isn’t an easy task. It will take just the kind of innovation, dedication, and sheer hard work that made London the global centre for the eurodollar markets through the 1960s, 70s and 80s.
For our part, the Government will continue to work closely with the private sector and with the mainland Chinese authorities and the Hong Kong Government to examine any regulatory and market infrastructure issues that need to be addressed.
And it is equally vital that the private sector here in London responds to the opportunity to establish this critically important market.
That means deepening expertise on the Chinese market, applying our skills to meet the particular technical requirements of this market as determined by the mainland Chinese authorities’ chosen approach to liberalisation.
And importantly, it means ensuring we develop a workforce with the cultural background and language skills necessary to forge long lasting relationships with our Chinese counterparts.
I am hugely encouraged by the high level of commitment to the task from some of London’s leading global financial intermediaries and market infrastructure institutions.
I am grateful too for the continuing work that the City of London Corporation’s Advisory Council for China is doing to deepen the dialogue between the financial sectors in the UK and China.
UK-China financial opportunities
But the opportunities for mutual growth in our financial services are much wider than just the RMB market.
The continued success of both the UK and China’s financial services is critical to our economic success.
In the UK the City of London continues to rank as the world’s leading financial centre, providing services to clients across the global market, accounting for around 10% of UK GDP and employing over 1 million people across the country.
And China’s financial sector success is critical to powering a model of growth through service, low carbon, and high value added industries, as well as broadening access to finance for Chinese SMEs and to remote rural areas.
By opening our sectors to further trade, investment and competition we have the opportunity to build from an already strong base.
Helping to stimulate renewed growth in the UK, and help China realise its ambitious goals set out in its 12th five year plan.
But at the same time, we’re all intimately aware of the risks that the financial sector can pose to our national and indeed the global economy.
Financial crisis and regulation
The financial crisis of 2008 has come at great cost to us all, and we continue to live under the shadow of those events as the instability in the Euroarea continues to undermine global market confidence.
We are committed to working with our Euroarea counterparts to resolve that instability, and restoring growth across Europe.
Growth that can be a important contribution to global growth, and growth in our partners’ economies.
Here in the UK we have managed to keep our economy out of the storm because of the decisive action that we took on coming into Government to tackle our deficits and promote a private sector recovery.
It’s that decisive action that has secured our stability, secured low and stable interest rates, and provided businesses with the certainty and confidence that they need to invest.
It is vital that we all demonstrate the same endeavour at the European level, and we are committed to working with our neighbours to realise that ambition.
As part of our commitment to implement the agreement our leaders reached at the Pittsburgh G20, we are working with our European neighbours to overhaul financial regulation to prevent any repeat of such a crisis.
We reject entirely the argument that we should delay reform at a time of instability and precarious growth.
It was weak and ineffective regulation in the first place that has resulted in a massive contraction in the UK, European and global economy.
A stable and resilient financial system is the vital precondition for sustainable economic growth.
But at the same time, regulatory reform has to also safeguard the innovation and openness that is critical to the success of the financial sector and the wider economy.
We cannot stifle open markets and suffocate competition even as we create a regulatory system fit for purpose.
It is vital that we ensure that regulation is implemented in full, is consistent and non-discriminatory.
Not just domestically
Not just within Europe
But right across the global market.
Consistent regulation - Basel III
At a time when we all have to do everything we can to promote growth, we have to resist any attempts to raise barriers to free and open markets.
We cannot fragment the European Single Market in financial services through opt outs from tough minimum regulatory standards.
It’s why we continue to insist that we all live up to our G20 commitment to implement the Basel III agreement in full.
It is only by embedding high, common and consistently applied standards that we can secure greater stability, reduce fiscal risk, and protect an open market and level playing field in the global financial market.
Third country access
At the same time, we cannot allow regulatory reform to be used as a tool to raise the protectionist barriers.
In Europe the Single Market is the most powerful tool that we have to foster renewed growth and promote collective prosperity.
But just as we promote open financial markets within Europe, it’s in all our interests, to promote open financial markets and free trade with the strongest and fastest growing global markets.
Non-EU investment is absolutely critical to Europe’s prosperity
Non-EU investors provided almost 30% of the total investment in EU cross-border securities in 2009-10.
In total, foreign investors control over $5 trillion of EU assets, investing a total of €230bn in the EU in 2010.
And the benefits run in the other direction too.
The EU is already the world’s leading exporter of financial services, with extra EU exports of €60bn accounting for about a quarter of financial services exports worldwide.
Open competition in the financial market, and the freedom to exploit new opportunities in the global market, is critical to delivering growth, employment and rising living standards whether in the UK, Europe of China.
Here in the UK we know just how important that investment is to restoring private sector growth and enterprise in our economy.
In particular, as many of you will know, we have set out plans for some £250bn of infrastructure investment in the next decade and beyond.
Investment that is critical to restoring our competitiveness, and keeping pace with the likes of Germany, the US and China.
But if we are to realise that ambition, we also need to secure greater private sector financing of our infrastructure investment.
And that means securing greater international investment.
We know that there is strong appetite in China for investment in UK infrastructure…
Take the China Investment Corporation’s investment in Thames Water Company earlier this year.
But there are even more opportunities in the years ahead such as the high Speed 2 rail link from London to Birmingham…
The Atlantic Gateway in the North-West of England…
Updating Britain’s energy infrastructure in order to meet our renewable targets…
And transforming digital infrastructure through substantial investment in super fast broadband across the country.
As Lou Jiwei, Chairman of the CIC said in the FT, investment in infrastructure represents a “win-win” situation for all.
Providing Chinese investors with solid returns and opportunities to diversify away from Government yields
Providing the UK with the investment we need to galvanise our recovery.
Opening access to third countries
But, just as we continue to keep the UK and the EU open for business and investment, we will also continue to work with third countries to open their markets to investment.
That won’t happen through browbeating.
Rather than insisting on unbending reciprocity requirements, the best way to encourage third countries to reform and open their markets is to offer opportunities for growth and greater prosperity.
We all benefit hugely when third country firms do businesses here in the UK and across the EU.
They provide competition, they bring expertise, and they contribute to the development of new markets.
In doing so, London in turn facilitates new opportunities for those third countries. The growth of the RMB business is one such example.
We do not agree that we should impose our rules on others. But we do agree all countries should adopt international standards. It is in no-one’s interest to have a race to the bottom.
But restrictive third country provisions will merely serve to harm the EU economy.
Not just the UK, but the thousands of businesses across the EU which rely on investment and services provided by third country jurisdictions.
For years the UK has maintained an open market for third country firms whilst taking into account retail investor protection and financial stability.
There is no “one size fits all”.
And it’s that same spirit of constructive cooperation that we have taken with our Chinese counterparts as we seek to expand our ties in financial services.
Both the UK Chancellor and Vice Premier Wang Qishan have described our bilateral technical and policy collaboration as ‘unrivalled’.
It’s through that collaboration that we have helped the Chinese authorities develop the corporate debt market, allowing foreign banks to trade bonds, as well launching special bonds for SMEs and credit default swaps.
As a result of the Economic and Financial Dialogue, China has also agreed to support the expansion of qualified UK financial institutions in the country.
And furthermore, through the EFD we have agreed to actively study and open up the mandatory third-party liability auto insurance market in China.
The experience of other well developed insurance markets shows that by reducing barriers and encouraging competition we can substantially lower premiums and expand coverage.
Financial services and the wider economy go hand in hand, forming a virtuous circle.
A strong economy provides good returns on investment, making an economy even more attractive for new investment, promoting even stronger growth.
We are only at the outset of an exciting new era of economic dialogue, cooperation and trade with China, but we have already made substantial strides in the last few years.
The financial sector will continue to play a critical role in both our economies, and as we emerge from the shadow of the recent crisis, the potential for UK-China trade and mutual growth is greater than ever.
We will continue to support the wider international use of the RMB and develop London as the natural complement to Hong Kong.
We will continue to promote open access to the UK and European market for Chinese institutions looking to expand and invest…
And we will continue to deepen and extend our financial sector work with our Chinese counterparts to fully exploit the opportunities for mutual growth in our Insurance and banking sectors as well as further progress in the bond markets.
The companies and organisations present here today will be critical to realising that ambition, and I look forward to working with you in that task in the years to come.