The deal is a win-win for both countries. By becoming a branch of the parent company, rather than a locally incorporated subsidiary, Chinese banks can draw on far greater liquidity from their overseas headquarters.
The agreement between chancellor George Osborne and vice-premier Ma Kai will largely release UK-based branches from the Prudential Regulatory Authoritys heavier regulatory requirements and put them in the orbit of Chinese regulators.
Overseas branches will also be able to leverage the credit rating of their parent with its greater financial firepower. That is significant in an environment where companies are paying more heed to their banks counterparty risk.
For Britain, the financial community should welcome a deal that secures Londons lead in renminbi trading outside China and Hong Kong. London handles 62 per cent of all offshore renminbi trading outside Greater China according to SWIFT, the global payments company. But cities such as Paris, Frankfurt and also Luxembourg where several big Chinese banks have already established European headquarters are vying for a slice of a growing market.
In fact, trade in offshore renminbi has more than doubled in the past year and it can only expand further given Chinas aspirations for the currency to one day rival the dollar and euro as a global reserve. For London to remain top dog in the renminbi market, the UK had to give Chinese banks greater scope to operate in the UK.
The deal is much more than just a boost to the City, however. It gives Chinese companies real confidence to invest in Britain. If Chinese banks that can more easily fund the foreign operations of their customers, those firms are more likely to invest. Europe is widely perceived by the Chinese business community as being a friendlier destination for Chinese investment than the United States. This agreement only strengthens Europes position.
Making it easier to invest in the UK is good news for an economy looking for new sources of FDI particularly for the kind of major infrastructure projects in which the Chinese have become experts over the past 20 years. Chinese investment in the UK almost doubled to USD2.7 billion in 2012, according to Chinas Ministry of Commerce.
Chinas involvement in a consortium about to build two new nuclear power reactors at Hinkley Point in western England is immediate evidence of that. The two countries are in fact a very good fit: China is keen to tap Britains knowledge economy and its expertise in areas like product design while Britain would like access to Chinas vast financial resources.
British companies are well positioned to take advantage of changes in the Chinese economy. Government efforts to rebalance the Chinese economy are providing a shot in the arm to service industries like banking and insurance sectors where the UK has obvious strengths. Better banking links between the two countries should help British exporters and mend a badly lopsided balance of trade. Britain exported USD9.5 billion of goods and services to China last year but imported USD52 billion from the PRC according to IMF data.
Countries such as Germany may have stolen a march on British exporters in the last decade, but as China adopts a less industrial economic blueprint, UK firms have a chance to catch up.
Osbornes charm offensive with London mayor Boris Johnson is also a gesture of the importance the UK government attaches to the relationship. Diplomatic links were damaged by David Camerons meeting with the Dalai Lama last May. The chancellors high-profile visit and the UKs decision to relax visa requirements helps reset that relationship.
Cutting the bureaucratic mess Chinese visitors go through to enter Britain not only encourages the business community. It also taps into the vast potential of China as a source of tourist pounds.
World Bank figures show China will have the largest middle class in the world by 2020 a vast potential pool of visitors to the UK. Yet currently, the vast majority of Chinese visiting Europe bypass Britain to travel on one visa through France, Italy and the 22 other states inside the Schengen area. The UK government was right to act.
So what will these pacts mean for the Chinese economy? Primarily they are a further step towards the creation of a fully international renminbi.
Despite accounting for more than 10 per cent of world trade, less than 1 per cent of trade deals are settled in renminbi according to SWIFT. China has already made the current account fully convertible and the countrys new leaders are likely to follow up by also making the capital account convertible in the coming years.
Chinas decision to grant London-based institutions greater access to Chinese markets proves its commitment to both London as well as the liberalisation of its own financial system. The RMB80 billion (GBP8.2 billion) quota granted under the Renminbi Qualified Financial Institutional Investor programme will enable investors in London to buy renminbi-denominated stocks, bonds and money market instruments inside mainland China.
Not only does that expand renminbi flows through Chinas capital account, it increases the range of renminbi-denominated products offered by foreign institutions. Britains financial services industry should ready itself for new opportunities out East.
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