UK opens doors to Chinese banks with special terms for lenders

©Bloomberg

George Osborne will on Tuesday roll out the red carpet for Chinese banks looking to expand in London, offering to break down regulatory barriers in a bid to reinforce the City’s position as a global renminbi hub.

In a major diplomatic initiative, the chancellor is expected to offer the prospect of special terms to China’s state-owned banks as part of his “personal mission” to make London a significant Chinese offshore banking centre.

The chancellor signalled his intent on Monday in Beijing, when he said: “A great nation like China should have a global currency.” China, he said, should seek to develop the renminbi “through the international centre of finance: London”.

The City of London is already the world’s dominant centre outside China and Hong Kong for renminbi foreign exchange trading, which amounted to a daily $5.3bn at the last count six months ago, according to the Bank for International Settlements.

Mr Osborne’s initiative to expand China’s influence in the City, set to be launched on Tuesday, after talks with Chinese vice-premier Ma Kai, responds to longstanding complaints from Beijing that regulators in London were making it hard for Chinese banks to expand.

China’s three biggest banks have set up their European headquarters in Luxembourg in protest.

But Mr Osborne will announce that the UK’s Prudential Regulation Authority will offer discussions with leading Chinese banks with a view to letting them run wholesale operations through branches in London, a potentially significant breakthrough.

Currently, at the behest of the PRA, Chinese banks in London operate largely as subsidiaries and are treated the same way as local banks – with tight standards on transparency, capital cushions and liquidity buffers.

However, if state-owned banks such as Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China were to operate through branches, they would have access to the vast resources of their main operations in Beijing and would be largely subject to Chinese regulation. Branches are subject to lighter supervision by the PRA.

Mr Osborne’s offer risks irritating other international banks in the City, where “subsidiarisation” has increasingly become the norm, as British regulators attempt to exert greater control over foreign-owned banks in an attempt to make the financial system safer.

But the chancellor, on an extended visit to China, believes the gesture will be seen as proof that Britain is prepared to do whatever it takes to attract Chinese investment and business.

On Monday he announced a simplification of visa procedures for Chinese tourists planning to come to Europe, while he also hopes to use his trip to confirm Chinese investments in infrastructure projects and nuclear power.

However, Mr Osborne’s belief that the renminbi will become a major global economy is behind Tuesday’s gambit, a move which he hopes will make London “a home of Chinese banks, Chinese bonds and Chinese finance”.

He said on Monday that 62 per cent of renminbi payments outside mainland China and Hong Kong already took place in London, but he wants to build on that trade. A large proportion of trading is dominated by UK-based banks HSBC and Standard Chartered through their offices in Hong Kong.

But no bank outside Asia yet has clearing authorisation, meaning that renminbi transactions ultimately have to be routed back to China. Bankers said a Chinese bank was now being lined up for UK authorisation, plugging a key gap in London’s armoury.

Mr Osborne will claim that an expansion of Chinese banks in Britain would be good for the UK, because they would help to support the expansion of Chinese business and investments.

Of the five Chinese banks hoping to operate branches in London – ICBC, CCB, ABC, Bank of Communications and Bank of China – only the last operates largely as a branch in London, dating back to the early part of the 20th century.