More than fifty years ago, the City of London began holding offshore dollar deposits, helping the British economy to offset some of the effects of a collapsing empire. “As the good ship Sterling sank, the City was able to scramble aboard a much more seaworthy young vessel, the Eurodollar,” is how imperial historians PJ Cain and AG Hopkins described the transition. “As the imperial basis of its strength disappeared, the City survived by transforming itself into an ‘offshore island’ servicing the business created by the industrial and commercial growth of much more dynamic partners.”
The City is working hard to carve a space for itself as an offshore hub once again, this time with the latest currency to emerge on the world stage, the renminbi.
Speaking at the Asia Financial Forum in Hong Kong last week, the British Chancellor of the Exchequer George Osborne said that he wanted the UK to be “the home of Asian investment in Europe,” reports the Financial Times.
Osborne also signed an agreement with Hong Kong to explore how London and the Chinese territory might develop closer currency links. This follows a policy announcement by the Hong Kong Monetary Authority outlining plans to open up its renminbi payment systems by a further five hours, which would enable better offshore trading with the UK.
As the world’s foremost foreign exchange hub, London has a strong case for becoming the next city (after Hong Kong) to aspire to renminbi hub status. London’s financial services industry already controls 37% of the world’s foreign exchange trade, making it a crucial centre of currency liquidity. And the UK’s time-zone means that a single trading day overlaps with both the US and Asian markets.
Despite these advantages, there is scepticism that the City will realise its renminbi ambitions anytime soon. Accounting for just 0.6% of China’s imports, the British economy lacks a deep trading relationship with China, unlike Hong Kong, which serves as an entrepot for cross-border trading flow with the Chinese mainland.
“For the Chinese offshore market to develop in London, there needs to be a critical mass of renminbi in the City,” Chi Lo, CEO of HFT Investment Management told Euromoney. Currently, the limited trade between China and the UK is restricting the size and pace of development for London as an offshore market for China.
John Ross, a visiting professor at Shanghai’s Jiaotong University, says that the City is doing the right thing in trying to position itself as a renminbi hub. But he also questions whether London’s bid will be successful. “The problem is that while London may have applied to become the European version of Hong Kong, China sees a more integrated Europe as its key partner – the UK is too small an economy to be an adequate counterpart for China,” Ross warned in a column for the Guardian, a UK newspaper. Ross also contrasts the UK with Germany, which has much more of a trading relationship with the Chinese: “Osborne clearly hopes to replicate in financial services what Germany has achieved with manufacturing.”
It is not only British financial services that are up for sale. Last week, China Investment Corp (CIC) bought a minority stake in Thames Water, London’s water supplier. Analysts estimate that the sovereign wealth fund paid between £600 million and £700 million ($937 million to $1.09 billion) for an 8.68% stake in the company, reports Reuters. Thames Water has been looking for capital to invest in an overhaul of infrastructure, say analysts. The upside for CIC? It will be getting the reliable returns typical of a water company, as well as the chance to show it can be trusted with partial ownership of key utilities overseas.
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