London stalling

Chinese banks say cheerio?

Chinese banks didn’t start arriving in London in numbers until after the financial crisis. But since then, China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China have all started doing more business in Europe’s financial capital.

Of course, this wasn’t the first time that Chinese financial institutions had opened for business in London. The earlier forays also happened under circumstances of financial uncertainty. In November 1929, Bank of China set up a branch office in London. China’s first overseas financial institution came into being just one month after the Wall Street Crash, which led to the Great Depression.

More than eight decades later and the Bank of China is still in London. But it seems that some of the more recent Chinese arrivals are having problems expanding their business in the UK.

It all started with a letter from the Association of Foreign Banks picked up by the Financial Times in late October. Addressed to the Treasury, the missive suggested that the Chinese banks were moving the management of their European businesses out of London due to regulatory and liquidity issues.

In particular, the FT suggested that the banks were moving some of their operations to Luxembourg.

A subsequent report by China Economic Weekly said that the story had been overstated. One source from Bank of Communications told the magazine that it hadn’t even opened any branches in Luxembourg, let alone transferred any business there.

But this does not mean that everything is rosy for Chinese banks in London. At the core of their complaint is the difficulty in setting up new branches. Instead they must establish subsidiaries, which is problematic because it means that each is regulated like a local bank, and hence subject to strict conditions regarding liquidity and transparency. on the other hand, UK regulators have less control over branches (which are regulated from the parent country of the institution) making them the preferred option for a foreign bank wanting to do business in London.

Furthermore, a subsidiary is subject to tighter lending controls, and is forbidden from lending more than its own capital. Branches of the Chinese banks are able to draw as required on headquarters’ balance sheet for lending purposes. It follows that a Chinese bank could grow its London loan book fastest via a branch, which is why the Chinese would like to open them.

“This restricts the growth of Chinese banks in London,” a Chinese banker told the South China Morning Post, adding that it is easier to open branches in other European cities, such as Brussels.

A spokesperson for the City of London, also speaking to the SCMP, admitted the issue, but said it wasn’t limited to Chinese banks. All banks from outside of Europe are expected to set up subsidiaries rather than branches. “This is not to target Chinese banks as all other foreign banks – from Indonesia or Brazil or anywhere else – face the same regulations,” he said.

The disagreement comes at a time when London is looking to become an offshore hub for trading and investment in the renminbi – a goal that has been encouraged by Chancellor of the Exchequer George Osborne. London has been making progress. In October, it overtook Singapore on one of the criteria, reports Asiamoney, with the UK now accounting for 28% of renminbi trade payments globally with Hong Kong and China.

Further fallout on the banking issue could prove a disadvantage for London and its plans to take a greater slice of the renminbi market. But China Economic Weekly suggests that a bit more regulation might be a positive: “Chinese banks are not short of capital and liquidity control is not a bad thing. On the contrary, Chinese banks should learn lessons and experiences from their regulation.”

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