Boost for City's China trade
The chancellor is deepening and broadening a partnership with the Hong Kong Monetary Authority to develop London as the major offshore centre in the west for trading the Chinese currency, the Renminbi or RMB (also known as the yuan).
With Norman Chan, the chief executive of Hong Kong's currency board, he is tomorrow launching a private-sector forum that will work on the creation of new RMB financial products and how the markets infrastructure of Hong Kong and London can be made more compatible.
According to Treasury officials, the partnership with Hong Kong puts London in pole position to be the major centre for trading the Chinese currency outside of China and Hong Kong (and see my note of last week for more on this).
"As the Chinese gradually remove the barriers to the international trading of Renminbi, and as it becomes a major global currency, massive amounts of new business should come to London," said a banker.
George Osborne, who arrived in Hong Kong today, said: "London and Hong Kong are uniquely placed to assist in the development of this exciting market."
The Chinese government has been very gradually relaxing strict controls on the value of its currency and on flows of capital. In tentative steps, the RMB is on its way to becoming a proper globally traded currency, commensurate with China's status as the world's second biggest economy.
An intergovernmental agreement that London and Hong Kong would form a partnership on RMB business was reached last summer. It is the latest stage in the freeing up of the market in the Chinese currency, which began in 2004.
To date, most international trading in the Renminbi has focussed on Hong Kong, where RMB deposits have ballooned by around £60bn in just the past 23 month. The volume of trade settled in the RMB has gone from less than 1% of the total to almost 10% over 18 months.
Also the size of the RMB bond market has gone from nothing to more than £20bn over four years.
A recent report by foreign policy think tank Chatham House forecast that trade transactions settled in RMB would reach $1 trillion (£650bn) by 2020, and that RMB bank deposits and the RMB bond market would each be a similar size by then.
Slice of the pie
The chancellor hopes that the City of London can win a slug of this international business and augment it.
An important recent development is that the Hong Kong Monetary Authority has significantly extended the operating hours of the RMB payments system, so that RMB transactions carried out in London during the European working day can be processed and settled speedily.
Bankers have told me that they would recruit new dealing teams for this expanded trade in the RMB, and lawyers also expect a boost from the development of new RMB denominated contracts.
This expansion of Chinese business in London is the second bit of good news for the City in the past few days, following the announcement by the insurance broking giant Aon that it would be moving its corporate HQ from Chicago to London.
The European question
For all the weakness of British banks, and the pressure they face to shrink - which saw Royal Bank of Scotland last week announcing a significant reduction in the size of its global investment banking operations - the City in a wider sense is still expanding.
The Treasury believes that the partnership with Hong Kong shows that the City has not been damaged by the perception that the UK's influence over the development of the European Union's single market has been undermined by the prime minister's recent decision to veto amendments to the EU's treaty as part of efforts to rescue the eurozone.
There are some, however, who believe that other sectors of the British economy, such as manufacturing, are actually hurt by the huge relative size of financial services, because the City sucks in talent and its earnings keep sterling at a higher level than is comfortable for exporters of good and non-financial services.