Bank chief says enhanced London presence brings opportunity and responsibility

China Construction Bank hopes to play a key role in helping London to build its strength as an important global renminbi offshore center, by becoming the official clearing bank for the city, says Feng Xilai, CEO of CCB London.

CCB, which has offices in the heart of London's financial district, has achieved many milestones in helping the capital develop its renminbi offshore activities.

Last June, CCB was declared the official renminbi clearing bank for London. An official clearing bank facilitates efficient clearing of offshore renminbi transactions, achieved through the appointed bank's direct cooperation with the People's Bank of China, the country's central bank.

In December, CCB received the green light from the UK's financial services regulators to set up a branch in London, which made it the second Chinese bank to receive this privilege since regulatory changes enabling foreign banks to establish branches. CCB's London Branch was launched on Feb 16.

Looking back at all these milestones, Feng says he feels the weight of responsibility to fulfill expectations in driving forward the process of renminbi internationalization, which has just begun.

"China is the world's second-largest economic power, but renminbi as a trading currency is still small as a proportion to its trade flows. This is a challenge we hope to address through renminbi internationalization," Feng says.

CCB Head Office is extremely supportive of London's renminbi clearing business and many departments provided tremendous assistance to London, especially Chairman Wang Hongzhang and other senior management. Before CCB became London's clearing bank, Feng's team did a great deal of preparation work, to make sure the bank's facilities were capable of carrying out the clearing.

"We had to make sure the IT system allows for such a big quantity of clearing in a secure and efficient way, and we have to ensure that renminbi offshore activities are cleared as the transactions take place, in the same time zone," Feng says.

He says the London clearing system is integrated into CCB's head office clearing facilities, as well as clearing facilities in the United States, to ensure real-time clearing in all time zones.

Feng says that as all the clearing infrastructure has been established, his team is now focusing on the task of attracting more clients to use its clearing channels, as well as increasing the volume of renminbi clearing activity through London.

By the end of 2014, CCB London had increased its internal borrowing limit with headquarters to 15 billion yuan ($2.5 billion; 2.1 billion euros), to support its clearing services.

In July, CCB London officially launched its renminbi clearing services and 34 financial institutions now process and receive renminbi payments through CCB London. Financial institution clients have access to renminbi payment services for 20 hours per day.

CCB, which started operations in the UK in 2009 by opening a subsidiary, is now expected to see its activities accelerate in the UK, as a result of receiving its branch license.

Different from subsidiaries, which can only have lending and financing capability proportional to the subsidiary's capital alone, branches' lending and financing capability is proportional to that of the parent company.

Feng says the establishment of a branch gives CCB more responsibility and opportunities. Rather than focusing on helping Chinese companies go global through lending and financing activities, which characterized the bank's past growth in the UK, it now competes on an equal footing with British and other foreign banks to attract international business.

This new milestone has also meant that CCB's team has grown, as personnel is a key factor in ensuring CCB's future competitive strength.

Feng says the qualities that CCB values in candidates include their language skills, professional skills, learning abilities, ambitions and keenness to contribute.

"The fast growth of CCB in London is intricately linked to the career development of our employees, so we want to hire staff who are proud to work in our bank, and want to go the extra mile to do their work well," he says.

Meanwhile, the branch license will allow the bank to venture into more activities, for example, the financing of large infrastructure projects.

Feng's team is now preparing to set up its capability to support renminbi settlement of trades on Exchanges.

Using renminbi on commodity trading platforms, for example, is also an important step of renminbi internationalization, Feng says. "As China trades so much in commodities, a lot of the exchange rate risks will be eliminated if the trades are denominated in renminbi," he says.

Feng says currently the renminbi is being used increasingly in Asia, in offshore renminbi centers including Singapore, Hong Kong and Malaysia, but more usage must take place in London and other European centers to make it a global currency.

Globally, use of yuan in all international trade finance grew to 8.66 percent in October 2013, from just 1.89 percent in January 2012, according to figures from the Society for Worldwide Interbank Financial Telecommunication, making it the second-most used currency for trade finance internationally after the US dollar, which accounted for 81.08 percent.

He says the accumulation of renminbi transactions in London is a crucial method to help London maintain its position as a global financial center.

"The concentration of offshore US dollar and euro transactions in London is a key reason as to why it is a global financial center, even though sterling transaction flows only account for about 5 percent of global currency flows. As renminbi transactions globally increase, London will greatly benefit from having an offshore renminbi center," Feng says.

At the same time, London is well suited to host much of the European offshore renminbi activities, and this market has enormous potential to grow, Feng says.

London's location makes it the ideal place to connect Asian and North American market time zones. In addition, says Feng, the UK government has demonstrated great support to develop renminbi activities in London, including the issuing of a renminbi sovereign bond and the establishment of a renminbi working group by the City of London.

He says the growth of renminbi will rely on both government and private sector initiatives.

"From a regulatory perspective, it would be helpful to classify renminbi assets as a liquid asset, so that companies and financial institutions will have greater desire to hold renminbi. As well, it would be helpful if the UK's central bank can help to accelerate the process of renminbi being accepted as a liquid asset in Europe," Feng says.

"It would also be helpful for renminbi to be accepted as a collateral currency by London's commodity markets, to encourage greater use of the currency," he says.

Meanwhile, the creation of more renminbi products in London's market by private sector players would also strengthen renminbi usage and liquidity in the city, Feng says.

"The market has great appetite for renminbi bonds, renminbi exchange-traded funds, RQFII (RMB Qualified Foreign Institutional Investors) products, amongst others."

As well, the increasing sharing of renminbi flow information and statistics would also encourage market confidence in renminbi activities. This includes renminbi deposit, loans and transactions. "Currently these data are released in cities like Hong Kong on a monthly basis, and in the future London should do the same," he says.

Looking into the future, Feng says there are three key globalization trends that London can play a significant role in assisting China with: the globalization of renminbi, the globalization of Chinese companies, and Chinese overseas education and investment.

Feng says all three of these trends of globalization are intricately linked to the increasing use of renminbi in the UK. These are trends that the overseas growth of Chinese banks can support.

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