This article originally appeared on the Chatham House website.
A key goal of Britain’s assiduous courtship of Beijing is to establish London as the main offshore centre outside Asia for the trading of the renminbi as China’s currency internationalizes. All the signs are that Prime Minister David Cameron is achieving his aim.
President Xi Jiping’s state visit to Britain is inevitably proving controversial. Critics accuse ministers of overlooking China’s human rights record in return for commercial favours; of being too soft with China for exporting cut-price steel that is costing thousands of jobs in Britain; and of exposing Britain to cyber security risks by inviting China to help build new nuclear power stations.
By contrast, securing renminbi business for London carries no such political risks. To use a cliché beloved by Chinese officials, it is a win-win proposition for both sides. London already vies with New York as the No. 1 global financial centre but it faces competition in Europe as a renminbi hub from Frankfurt, Luxembourg and Paris. So Cameron will have been relieved to hear Xi, in his address to the British parliament, go out of his way to describe London as ‘the leading offshore renminbi trading centre after Hong Kong’.
Any successful financial market requires a wide range of investment choices and liquidity – the ability to buy or sell currencies and financial assets in volume without triggering violent price swings. China has taken steps towards meeting those two criteria during Xi’s visit. First, in its debut London debt sale, the People’s Bank of China, the central bank, sold RMB 5 billion of one-year bills on Tuesday. The issue was six times oversubscribed as investors sought to snap up a safe asset with a generous yield. China’s Ministry of Finance is also expected to sell debt in London soon, according to media reports, in what would again be its maiden issue outside the mainland and Hong Kong. Second, China on Wednesday nearly doubled a bilateral currency swap agreement with Britain to RMB 350 billion. The swap would be activated in the event of a shortage of renminbi cash in London, ensuring businesses can still settle exports and imports in renminbi and that liquidity in the fledgling bond market does not dry up.
These apparently arcane announcements are extremely significant not only for London’s continued success as a financial centre but also for China’s ambition to promote the renminbi as a currency increasingly used not just for trade but also for global investment. After all, as the Nobel prize winner in economics Robert Mundell has said, great powers have great currencies. Chatham House is exploring the internationalization of the renminbi in aconference in London on Thursday and has held two preparatory workshops on the issue.
Financial services are one of the most promising areas for Britain in its quest for closer business ties with China. But it is not the only one. China is steadily making the shift from investment-powered to consumption-led growth. For the first time, services and consumption accounted for more than half of Chinese GDP in the third quarter. The share rose to 51.4 per cent, up from 41.4 per cent a decade ago. As incomes rise further, this trend is certain to continue. So people will have more money to spend on other services in which the UK excels such as cultural products (think Downton Abbey and Shaun the Sheep), education and tourism. Making visas cheaper and easier to obtain for Chinese visitors to Britain will be another lasting legacy of Xi’s visit.
Other payoffs from Britain’s flattery of China are less certain. Chancellor of the Exchequer George Osborne’s eagerness to join the China-led Asian Infrastructure Investment Bank has angered the US. Will influence for Britain in the bank and a stream of contracts for British engineers eventually make the diplomatic spat worthwhile?
There is no assurance that the rewards of cosying up to China will outweigh the risks. China generally respects those who display firmness not weakness. Nor is there a guarantee that the renminbi will establish itself as a major reserve currency and that London will corner the market in it. But for Britain, a middle-sized power in relative decline thinking strategically how to play the fast-rising No. 2 economy in the world, its courtship probably makes sense.