China: the UK’s other special relationship
Joe Wright, 16 October 2013
George Osborne and Boris Johnson have spent the week courting Chinese leaders to convince them that London, despite its flaws (or maybe because of them), remains the financial capital of the world and the only place for China to begin opening up to western markets. The deal being brokered includes a licence for the UK to invest as much as £8bn worth of renminbi into Chinese stocks, bonds and market instruments. It is the first such licence to have been granted to a western power, with Taiwan and Hong Kong being the only other holders.
At the moment, China’s five largest state-owned banks operate in the UK as subsidiaries. They are subject to high levels of scrutiny by regulators and have limited access to capital. Under new plans, these subsidiaries will become branches – outposts of their parent companies in China – unleashing them from tighter regulations and giving them access to huge sums of capital from their parent-company.
The Chancellor hopes this move will free up Chinese banks to pour millions into the UK’s ailing infrastructure. Liverpool’s Merseyside and Manchester Airport are already set to receive millions more in funding for new building projects.
Yet, there are growing concerns with the deal, and particularly with the health of the Chinese economy. The Chinese government has begun to significantly increase its deficit in a bid to counter drops in the growth rate with greater state investment – to little avail. The banks pushing for branch status in the UK are, after all, state-owned.
The main concern, however, is with the new ‘light-touch’ regulation proposed for these branches – a key concession for obtaining the licence from China. According to the Financial Times(£), US banks and UK lawyers have accused Mr Osborne of political interference in regulation and undermining the independence of the recently-formed Prudential Regulation Authority (PRA).
It was, of course, the same light touch that allowed the operations of foreign-owned banks, like Iceland’s Landsbanki, to act so irresponsibly in the UK before their eventual collapse. It is also reasonable to believe that any would-be financial dispute between China and the Treasury would be far less cooperative than those that took place with Iceland over the operations of Icelandic banks in the UK. Further still, the conversion of these Chinese subsidiaries to branches comes at a time when many foreign banks are opting to operate in London only through subsidiaries –at the behest of the PRA no less.
Mr Osborne is in a difficult position. The UK needs investment and it is not likely to come from anywhere else. The Chancellor is determined London will retain its status as the financial capital and that includes the risks of being the first to deal with untested countries like China. For the more optimistic, this deal could also be a possible first step by China to finally liberalising control of its currency and opening up to the west.