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Chinese Banks Expand in London, Despite Investors’ Brexit Worries
Economic uncertainties have led the UK to tumble down the rankings of attractive destinations for outward direct investment, but financial institutions still swear by importance of the UK capital’s banking sector.
Chinese banks have continued to expand in London, following an increase in UK-Sino trade and investment, which appears to go against the economic uncertainties expected as a result of Britain’s departure from the European Union.
Although Chinese banks were very late to arrive in London, experts say their presence has helped maintain the British capital’s role as a global financial hub at a time of great political and economic uncertainties in the United Kingdom.
“We are fully committed to the UK market,” said Zhu Jianhai, head of corporate banking at Agricultural Bank of China (UK) Ltd, “The UK’s financial service sector has evolved to build a robust financial infrastructure for 100 years, which is the solid backbone of financial activities. This is one advantage that Brexit cannot take away.”
Agricultural Bank of China, which established its UK subsidiary in 2011, is now preparing to open a London branch in the near future, which will increase the number of services and products it offers.
In the past four years, four Chinese banks have established London branches: China Construction Bank, Industrial and Commercial Bank of China, China Merchants Bank, and Bank of Communications.
Meanwhile, Bank of China, which established a London branch in 1946, has become a respected player in London. General manager SUN Yu, is the chairman of the UK’s Association of Foreign Banks.
Sun said London was an irreplaceable platform for Chinese banks who want to internationalize themselves. Chinese banks also have helped London better interact with China, its economy and stock, and bond markets.
One major focus of Chinese banks in London has been the provision of lending and finance to their existing Chinese clients, who are increasing the trades and investment in the UK. UK-Sino financial collaboration began with President Xi Jinping’s state visit to the UK in October 2015.
So far, China has invested over US$17 billion in the UK, which is more than it has invested in any other European country, other than Germany.
Chinese banks have grown in London, thanks to the city’s emergence as a Western renminbi offshore hub and it is now the biggest offshore renminbi foreign exchange trading hub outside Asia. Data for the first quarter of 2017 collected by the Society for Worldwide Interbank Financial Telecommunication shows that 36.3% of global offshore renminbi exchange transactions were conducted through London.
One milestone that facilitated London’s offshore renminbi activities growth was the appointment of an official renminbi clearing bank in London by China’s central bank, the People’s Bank of China.
China Construction Bank, the appointed clearing bank, was able to settle transactions directly with PBoC, improving the efficiency of foreign exchange clearing.
China Construction Bank has cleared RMB20 trillion (US$1.5 trillion)of transactions since June 2014, when it received the appointment.
According to CCB statistics, London’s offshore renminbi transactions have remained high, despite Brexit uncertainties. Between August 2016 and August 2017, offshore renminbi transactions in London stood at RMB800 million, which were 20% year-on-year growth.
Although Chinese banks’ London activities has so far focused mainly on straight banking activities, such as lending, financing, bond issues, and foreign exchange. These banks are also constantly innovating new services and preparing more complex loan syndication and derivative activities.
Just last month, Bank of China launched a private banking service in London with the aim of tapping into the burgeoning pool of wealthy Chinese people living in the UK or visiting it.
“The Bank of Communications plans to increase its London-based financial activities by getting involved in foreign exchange trading, liquidity management for corporate clients, the development of new investment products, and debt capital market activities,” said John Liu, a general manager of its London Branch.
Chinese banks are also looking to become lead loan syndication banks to finance larger projects, such as sizable Chinese investments in the UK or infrastructure projects in the area covered by the China-led Belt and Road Initiative.
Instead of financing a project themselves, Chinese banks would conduct the legal, financial and technical due diligence on deals, understand their risk and profitability profile, and present the information to international banks.
“One factor that encouraged them to initiate this shift in their business models is the enormous scale of the Belt and Road Initiative,” said David Milligan, a banking and finance lawyer at Norton Rose Fulbright, “Because the scale is so big, Chinese bank’ previous approach is not sustainable.”
The overall attractiveness of the UK means Chinese banks can use the UK as a base to increase their operations in the US, Middle East, Africa, Asia and other areas, so do Chinese companies. Even though many Chinese companies are still SMEs, they still have the chance to own their own branches in the UK or other countries with the support from UK branches of Chinese banks. Therefore you will not need to import products only limited in China.
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