The development of the offshore renminbi market in London will be hindered unless UK regulations for foreign banks are relaxed and the Bank of England establishes a swap line with the People's Bank of China, say Chinese commentators.
Londons ambition to become the leading western hub for offshore renminbi (RMB) will come under pressure if the Bank of England (BoE) does not create a swap line with Chinas central bank, Xia Bin, director-general of the Finance Institute of the State Council Development Research Centre in China, has said.
A swap agreement with London is "important for market confidence", for the economies of Hong Kong and the UK, and also for "promoting the development of the offshore renminbi", said Xia, counsellor of the State Council in Beijing, China's chief administrative authority.
Xias announcement on Wednesday at a seminar held by the City of London came a day after the second London-Hong Kong Renminbi Forum, and echoes comments made by bankers in the City.
The Forums aim is to cement London as the principal western hub for offshore renminbi and to promote collaboration between Hong Kong and London in the development of the offshore RMB market.
Separately, with UK capital and liquidity surcharges above the Basel III minimum, Chinese banks gunning for expansion within the City could be "discouraged from doing so as a result of additional funding and capital costs", said Jesse Wang, executive vice-president of China Investment Corporation at the seminar.
The discussion comes after regulations by the Financial Services Authority were introduced in October that limit the number of foreign bank branches that can be opened in the City.
The policy sparked a letter of complaint to the UK Treasury by the Association of Foreign Banks on behalf of the Chinese institutions, citing, among other things, onerous liquidity requirements in the UK.
China Construction Bank opened its Luxembourg branch in September this year, following Industrial and Commercial Bank of Chinas example. Citing the allure of other financial centres, Wang stated that London could lose its competitive edge. As financial service jobs in the City dwindle amid the recession, New York and Hong Kong could surpass London in importance, he said.
By 2015, there will be more financial professionals in Hong Kong and New York then there will be in London, which could harm Londons reputation as the leading finance centre, says Wang.
However, Mark Boleat, chairman of the Policy and Resources Committee of the City of London, hit back. He said: The Bank of England will only do a swap if it is necessary and will not do so just to make a statement." He added: Policies we have towards banks in the City of London are towards all foreign banks, not just Chinese banks.
In any case, analysts say, in the short-term at least, a swap line would boost market confidence about the BoEs access to emergency RMB liquidity, rather than providing a material boost to day-to-day trading.