Europe helps boost yuan use internationally

Trade in offshore renminbi has since boomed. Increasing Chinese exports have also led to a surge in demand for renminbi outside China as Chinese exporters increasingly expect to be paid in their own currency to eliminate exchange risks.

Initiatives from Beijing to internationalize the renminbi have created great competition among global financial centers across Europe, Asia and the US to gain a bigger share of the pie.

Asian financial centers like Singapore are following Hong Kong's footsteps to grow offshore renminbi activities, fully utilizing their advantage of geographical proximity to the onshore mainland market.

In Europe, competition has been particularly strong between London and Luxembourg, with London being the famous financial center for banks and foreign exchange, and Luxembourg a global center for funds.

One issue that has received great attention in recent years is fierce lobbying by Chinese banks to establish branches in London, threatening that they would shift investment to Luxembourg if this could not be achieved.

Since the financial crisis in 2008, the UK regulator has made it almost impossible for foreign banks to set up branches in the country. Banks with branches would have had lending and financing capacity proportional to the parent company's balance sheet.

Subsidiaries, in contrast, are subject to the strict capital requirements that apply to UK's local banks, so lending and financing capacity is proportional to the balance sheet of the subsidiary itself.

Years of lobbying led to substantial regulatory changes last year, and this month ICBC received its branch license for London.

Michelle Chen, a partner at the London-headquartered law firm Squire Sanders, says the granting of the branch license to ICBC and potentially other banks in the future supports the process of yuan globalization in London.

"The significance is not just for ICBC," Chen says. "I believe more Chinese banks will be granted branch licenses in the UK over time."

Meanwhile, another significant outcome of the UK-China Economic and Financial Dialogue is the creation of a private sector working group to help develop China's onshore bond market further.

Chaired by the International Capital Markets Association in Zurich and China's National Association of Financial Market Institutional Investors, the working group will bring together experts from financial institutions in London and China to help China further develop an onshore bond market.

Spencer Lake, global head of capital financing at HSBC Holdings Plc, who is also deputy chairman of the International Capital Markets Association, says his team is looking forward to working with policymakers and industry experts, including the association and the National Association of Financial Market Institutional Investors, to build closer links between the UK and China capital markets.

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