The risks for the City of becoming China's offshore centre

 
ICBC and Chinese flags Good for Chinese banks, good for China - but what about the UK?

The chancellor has today announced an agreement with China's vice-premier, Ma Kai, to help fulfil his aim of making the City the main offshore centre for Chinese financial business.

Under an £8bn pilot scheme, London-based investors will be able to apply for a licence to use the Chinese currency, the RMB, to invest directly in Chinese shares and bonds, rather than having to direct their investments via Hong Kong.

This should reduce the costs of investing in China via London - although the sums involved in this initial pilot are small.

George Osborne has also brokered talks between Chinese banks and the UK banks regulator, the Prudential Regulation Authority, to allow them to establish branches for wholesale activities in London.

This would allow China's huge banks to conduct business in London with companies and financial institutions, but not retail customers.

It will be fascinating to see how fast the UK regulator negotiates the award of these branch licences, and what conditions it attaches to them.

There is a lively debate among regulators about whether it is healthy or dangerous for the City to be thronged with branches of huge international banks, as opposed to subsidiaries of international banks.

Where a bank has a subsidiary in London, it is subject to much tighter regulation by the PRA than a branch would be.

But in the event that a foreign bank runs into financial difficulties, the cost of rescuing a subsidiary would fall on British taxpayers and the UK deposit protection scheme, whereas the cost of rescuing a branch would fall on the taxpayers of the bank's country of origin.

This debate about whether branches or subsidiaries are better for Britain has become livelier following two recent events:

  • the so-called London Whale scandal at a London-based branch of JPMorgan, which was subject to relatively light touch regulation here;
  • and the collapse of Cyprus's Laiki branch, which operated as a branch in Britain and wasn't therefore covered by the deposit protection scheme.

Banks themselves much prefer to branch into new territories, rather than establish subsidiaries, because branching is much cheaper and more financially efficient.

Since the crash, British regulators have been trying to encourage banks to convert their British branches into subsidiaries.

However, Andrew Bailey, the PRA's chief executive, recently signalled in a briefing to bankers that he was coming round to the idea that branches were not such a bad idea, so long as the PRA could have reasonable access to them and oversight of them.

In the case of China's giant banks, the chancellor seems to be taking the view that he would prefer the branch arrangement that would see the Chinese government as the ultimate guarantor of the liabilities of their future London operations - although this would have the potential for becoming messy if any of those banks behaved recklessly here.

UPDATE 08:15 BST

Here are a few other points on the chancellor's deal with China on making the City a bigger centre for trading the RMB, the Chinese currency.

First, he is hopeful that the £8bn capacity for direct investment in Chinese stocks and bonds is a quota that will be more or less automatically renewed, when it is used up.

Second, the initial licence to invest directly in this way is likely to go to a bank, rather than a fund management group. I hear HSBC is in the frame to get the first licence.

Third, London is the first place outside Greater China to be granted a quota for direct investment of this sort.

Fourth, the Treasury is confident that the PRA will grant branch licences to China's biggest state-owned banks.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 161.

    Following on from 160.

    The elected governments are just puppets as was shown by the Tories during the last election claiming they were friends of the money people and would save Britain. Governments are like the Dukes and Sheriffs of old and work for the global rulers.

    The 1984 senario will come from the Right and not from the Left.

  • rate this
    0

    Comment number 160.

    Continuing from 147.
    We are indoctrinated by foreign owned media.
    After this Post Office sell off the NHS will be sold off and then Buckingham Palace and the Queen.
    When the old kings and rulers lost their power because of democracy, they moved on to international finance and companies now control the world and its governments.

  • rate this
    0

    Comment number 159.

    It will be interesting to watch future gyrations in sterling now that China are the new paymasters.

    I remember them as much cleverer on terms of trade than we are, so when sterling is strong they will be selling goods and when it is weak they will be buying assets.

    Are we "too big to fail" in the sense they will prop up sterling to a degree so they can sell us stuff? Difficult to say.

  • rate this
    0

    Comment number 158.

    FauxGeordie @157
    "revised"

    Found-out in theft - "in it together" - of Golden Eggs, our Quisling-elite confirm allegiance (entrapped from birth), worse than 'just borrowing' the Golden Goose, busy now flogging it off to "our competitors" (with whom they will of course have shares, to support life-styles & private pensions). Is this lunacy, or treason? Against democracy, or just against 'Britain'?

  • rate this
    0

    Comment number 157.

    154 Huawei are all over our core telecoms network (including the secret stuff) because BT wanted to save a few quid

    148 Cameron is not an economist he is a PR man who had a short career in a job his mummy got him. He's never had a real job - like Osborne. However he has got an awfully large amount of money

    Random16 (various) - Osborne avoided a TRIPLE DIP recession when figures were revised

  • rate this
    0

    Comment number 156.

    Up2snuff @153
    "confused"
    Old nuclear
    Price guarantee
    Other-side-of-world

    Labour & sacrifice of miners & oil-workers gave power for industrial revolution. Instead of building energy for a sustainable future, from sun (water-cycle & now collectors & photo-voltaic), from moon (tidal), from Earth (geothermal profit sustained by deep 'nuclear'), we 'invested' in middle-men, wars, now last old-nuclear!

  • rate this
    0

    Comment number 155.

    This is just the advancement of global capitalism.
    Investment and management on a global scale.
    UK has been particularly good at this in the past.
    Now China is getting in on the act.
    Prepare for more Chinese ownership of large PROFITABLE companies.

  • rate this
    0

    Comment number 154.

    The BBC is reporting that Osborne is also doing a deal with the Chinese telecoms technology company Huawei to ser an R&D centre in the UK yet the Americans and Australians banned similar deals on security grounds.

  • rate this
    0

    Comment number 153.

    Snuffy is a little confused here. Robert appears to be in a bit of a panic & I'm not sure why. The Chinese appear to be on verge of allowing £8bn of trades to go through the London bond market & one or more State banks to open branches or subsidiaries. All welcome business but in the scheme of things, relatively small beer. It's all regulated, too, so why the fuss?

  • rate this
    0

    Comment number 152.

    luditus @146
    "desperate"

    To sustain all the people of today & tomorrow, raising all to fair status, 'we' would need to allocate capital efficiently, not by-product of greed:

    For democratically-evolving universal 'basic infrastructure' (homes, shops, hospitals, schools, etc)

    For democratically-directed 'geographic exploitation' (farming & fishing, mining & manufacture, etc)

    (WHO votes nuclear?)

  • rate this
    0

    Comment number 151.

    Fairsfair@147
    "call themselves British"
    We've always 'known' fact & value of 'symbiosis' (friendship, marriage, extended family, locality & alliance), 'shoulder to shoulder' with victims of terrorism, coming to understand potential & necessity of democratic rather than corrupt politics, of rule home AND abroad 'Of, For, By, the Equal People', the alternative our 'war cycle', spiral to global death

  • rate this
    -2

    Comment number 150.

    It's irrelevant whether our economic assets are owned by the Chinese, the Russians, the Brazilians or the Americans; if we don't own them, the consequences for our economy and our society are terrifying.

    We won't benefit from our work and we will have no control over our future.

    The profits of our labour will be exported; if we are no longer the best place to invest, Britain will close.

  • rate this
    -1

    Comment number 149.

    alan @48
    "a terrible indictment"
    Of just "Blair/Brown years"?

    "Serious overtures to China", in advance of such to the excluded here, the hopeless unemployed, under-employed, under-paid & over-paid.

    Even those ';just right' dimly aware of deprivation, in a market geared to either poor quality 'economy' or high quality 'luxury', for different reasons 'throw-away'. Democracy an illusion in contempt

  • rate this
    0

    Comment number 148.

    It's a terrible indictment of the Blair/Brown years that we are only now making serious economic overtures to China.
    Thank goodness we now have two economists in key positions: David Cameron and Vince Cable.
    All the last lot did was to run down manufacturing and support the banks.
    Alan

  • rate this
    0

    Comment number 147.

    We buy foreign goods, support foreign footballers in foreign owned local football clubs, drink local water owned by foreign companies, walk on foreign owned land, live in foreign owned houses and work for foreign owned companies for foreigners’ profits. Yet some of the people who support all this get annoyed about immigration and call themselves British.

  • rate this
    -1

    Comment number 146.

    So majong now comes to the CoL casino, chopsticks to be made in Sheffield, and boiler suits on the catwalks. Anyone got any tusks for sale? Nimimbi buys all. Boris and George's trip is a sign of just how bad the situation is, and maybe of how much worse they think it could become. Desparate times require desparate measures.

  • rate this
    -2

    Comment number 145.

    Grounder @144
    "best of education"

    The Jesuit boast, "Give me the child…" And we do

    Oddly, the Imitation of Christ is a password, perhaps in hope un-coached

    The coaching, I know, works… But in mysterious ways… Mammon is strong

    You will know of 'economic services' rendered from academia?

    Grounder, good to talk!

    Time for prayers

    Goodnight

  • rate this
    0

    Comment number 144.

    @143 All
    Seen enough to know that the best of educations is no defence against folly? But rest assured I was not including brave Proreus among the monkeys! I quite like "expulsion from the future" for our democrats unborn - as a phrase for an unlovable and problematical concept.

  • rate this
    -1

    Comment number 143.

    Grounder @142
    "foolish"?
    Not exactly,
    Rather, well educated

    Enough seen to know that enough wrong at enough levels to think it possible too few if any might wake to be in time to wake the rest as we wash over the larger Fiscal Cliff. A global economy, it turns out, signals globally - sadly not clearly enough through Hollywood - in finance & conflict & climate change & expulsion from the future

  • rate this
    0

    Comment number 142.

    @141 All for All

    All our agents in the economy for All; against seven billion or ten, how many foolish monkeys shall prevail?

    Let the PRA regulate as seems most wise, and let British companies and institutions tread warily, progressing steadily towards a sustainable future for ten billion or more.

 

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