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
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    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
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    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
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    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
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    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

 

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