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The Lord Mayor, China & Brexit

November 1, 2016 3:05 PM
By Dr Yee Wah Foo and Cllr Tatyan Cheung

Co-Chair of Chinese Liberal Democrats Dr Yee Wah Foo and Cllr Tatyan Cheung report back on the APPCG meeting they had attended on 24 October at Portcullis House, chaired by Richard Graham MP on the Lord Mayor of London's recent visit to China:

The Lord Mayor had led a business delegation to HK, Beijing, Shanghai and Tianjin. The panel members were: Sir Tom Troubridge (CBBC), Stephen King (HSBC) and David Sayer (KPMG)

Chinese and UK flags

Lord Mayor:

President Xi's visit to London last year paved the way for good relations. This visit to China falls on the back of Theresa May's G20 talks with Chinese officials. Group was well received and although there is a frankness about the challenges ahead the Chinese want opportunities to do business. Confidence in HK and in China is good. Green finance is a major area for investment; was discussed in G20 talks and Chinese are showing leadership towards investing in UK expertise. Mostly China wants clarity about the Brexit future; they are concerned about visas and passport issues for their City workers.

Although the Hinkley issue has been resolved and there appear to be no ill feelings from the Chinese on that score, Lord Mayor perceived some concerns about the future. Finance, especially 'green finance' is the way forward - much discussed in China's 13th 5 year Plan. Discussions took place about 'green bonds' but there would need to be some standardization of what is 'green'. The vice president of the New Development Bank has been invited to London to promote business. London has invested much towards creating the right atmosphere and good relations. There are already several Chinese state banks operating in the UK; the City welcomes them with open arms, Brexit or not, and Lord Mayor is determined to keep dictum 'a new golden era' in Chinese-British relations.

UK is China's chosen partner in Capital Markets, Fintech and Green Finance, and the Chinese are more interested in the opportunities rather than the challenges Brexit will bring. Already the largest offshore centre for the trading of the RMB with the 5 largest Chinese banks established branches in London along with many Chinese legal and professional companies. It is expected more of the same and business should grow. Not much new insight other than the emphasis the Chinese are really going Green.

The Lord Mayor was more muted about whether the Chinese investors relished this Brexit referendum as a golden hello handed to them by the British people.

Sir Tom Troubridge, VP of China -Britain Business Council

They have 15 offices in China, so intelligence is good. Xi's visit last year re-set the good relations so Brexit is not a game changer in his opinion.

In Shanghai there were 2-300 businesses lining up for opportunities in UK, so he is expecting a lot of visits.

Last year's release of bonds were heavily subscribed to.

Depreciation of the £ relative to RMB has meant a surge of Chinese investing in the UK and Tom sees even more investment in areas such real estate because UK is trusted - rule of law, etc. We need investment here. High-speed rail, in the financial and professional services, in healthcare ventures, even Heathrow. China is not looking for over 50% investment, (only exception is Huawei) so that is positive for UK, although we should be under no illusions about the fact that investors want a good deal.

In banking, China Construction Bank cleared over 10 trillion RMB in trading - and this will not change; China's one belt, one road infrastructure project connecting China to Europe offers significant opportunities for us.

Cllr Tatyan Cheung made the point that Huawei is the only Chinese company that has more than 50% of its revenue earned from abroad, such that Chinese companies are under invested overseas, and this will only go up in future regardless of Brexit. Apart from existing investments in properties, utilities and infrastructure, the Chinese are interested in consumer brands, healthcare, engineering and big projects like HS2.

Tom reiterates the 'Golden Era' and very much implies as 'money making time' whereas the Chinese term - 黄金时代 has connotation of grandeur, bright and historic. Cllr Cheung makes reference to Han and Tang dynasties, and now the PRC -- the dynasty without emperors.

Stephen King, HSBC (Sr. Economic advisor)

First and foremost UK depends on direct foreign investment. We have a 5-7% current a/c deficit and we need to fund it. Our balance of payment has come down and the £ has been devalued. Over the next 2 years our domestic economy will either slow down, stay flat, or we could have hard times ahead, OR, we can cultivate new friends (ie. Chinese investors). Hinkley was very important to us.

Many would suggest Chinese economy is about to slow down; this won't happen - China is different than Japan of 1980s - China's per capita income is very low, $US8K/year therefore lots of growing/catch up potential; as an emerging market, Chinese domestic savings are very high; China's regions have huge growth capacity, i.e. Xinjiang, the northeast, etc. - all to be helped by the one belt/road project. Conclusion is that China is doing well and big opportunities remain and will be significant in the future, so doubly important for the UK.

Stephen highlighted the risks of Brexit with Britain running a large balance of payment deficit requiring continuous inward investment to finance it. Brexit could jeopardize inward investment with the decline of Sterling and the continuous poor productivity since the 2008 financial crisis.

To address this deficit, either have the domestic economy to slow down, as is happening now with higher inflation reducing real spending power, or have foreign friends to finance the deficit - ie Chinese investors.

Stephen is very positive about the Chinese economy and praises highly of the Belt and Road Initiative that will bring huge development within China as well as spanning Asia to Europe.

David Sayer, VP of financial services, KPMG

We welcome licensing of Chinese banks to London; Chinese see recognize we have good legal system, stand by our rules of law, etc. so a vital point post Brexit is ability to bring over Chinese to staff their enterprises. Visas are key to this. Priority for Chinese is ability to serve their customers and China wants to reassure them; investment banks wanted London branches with subdivisions in the EU but now this model may not be viable - key is how to proceed; Chinese banks are considering seriously how they can distribute their services; where do they do the processing, servicing, IT, etc?

Opportunity is still out there; RMB clearing is still good; inward investment in business is also buoyant - in fact 25% more attractive with devalue of £. The belt road is a fabulous opportunity with long term returns and London can give reassurance on complex contracts, to getting financing assurance, project financing - so all in all, our trade opportunities are here in spite of Brexit.

Chinese banks are not so much affected by passporting issues if Britain end up with a 'hard Brexit', they already have branches in other EU member states. The concern is how best the banks distribute the work across member states.

The Chinese are focusing on real opportunities like the internationalization of the RMB, inward investment in the UK after the recent devaluation of Sterling, and the Belt and Road Initiative championing green infrastructure.

Questions posed:

Are talks about a 'Shanghai Free Trade Zone' still in effect and is this dream fading? Answer: little sign of new developments - a slowdown in dialogue, but not completely out of the question.

One belt/road becoming a political issue, so is it a threat? What does panel think: Answer: Yes, true and UK needs to be mindful of SCO (Shanghai Coop. Organisation), exclusion of USA and other allies (Japan, India) in any dealings;

Is soft power being considered in UK, i.e. learning Mandarin in highschool? Answer: more should be done in this regard.

From Tatyan Cheung: We have been discussing issues that concern the City. But what about our regions vis a vis manufacturing and export. How can we encourage growth potential outwith London?

He asked the question is the City encouraging Chinese investment in the manufacturing industry so that we have more to export from the regions other than just London/the City. The panel fudged the answer with mention of the Chinese buying up Piazza Express and looking into healthcare.

Intellectual property rights are still a problem for exporters; exporters get wary when they see their products being reproduced as poor copies.

Final remarks:

Future is bright; China's opening up has been an epic story of huge proportions. UK could do with a 'go to' champion now that George Osborne is not around.