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Wise to open markets wider, Londoner says

THE start of the offshore yuan business in London in April 2012 turned the city into the first Western frontier for the global emergence of China's currency.

A June report by the City of London, the financial heart of Britain's capital, showed strong growth in corporations deploying the yuan in business transactions, following extensive marketing of the new services by UK-based banks.

Import and export financing in the yuan doubled to 33.6 billion yuan (US$5.4 billion), and volumes of a full range of deliverable forex instruments and spot yuan trading more than tripled annually to a daily average of US$2.5 billion.

Behind that remarkable progress is Mark Boleat, leader of the London yuan business initiative and policy chairman of the City of London Corporation.

He is responsible for the City's financial and professional services policy development, engaging with key financial players in Europe and across the globe on policy issues affecting London as an international financial center.

He was in Beijing and Shanghai between June 27 and July 1 on a mission to strengthen financial links between the UK and China. In Shanghai, he attended a closed-door meeting of the Shanghai International Financial Advisory Council, which advises Shanghai Mayor Yang Xiong, and he spoke at the Lujiazui Forum.

Shanghai Daily caught up with Boleat to discuss Shanghai, London and the yuan.

Q: What advice would you give Shanghai in its pursuit of becoming a world-class financial center?

A: I was asked this question many times. There are three things Shanghai should do now. The first is liberalizing the capital account, the second is developing a professional services market, and the third is eliminating discrimination against foreign institutions. Opening to more foreign institutions would mean more money, more hotels, more office blocks, more foreign visitors and more professionals like accountants and lawyers coming to Shanghai. That would make the city more prosperous.

Q: Talking about the capital account liberalization, how attractive do you think China's capital market will be to foreign investors when it's opened up? We know China's stock market is among world's worst performers in recent years.

A: I think people looking to invest in China are betting over a very long term. It's only when you open the capital market that you begin to see what the demand is. Many foreign institutions do not look at China's market now because they cannot invest in it. The central bank has reiterated its intention to open up the capital market, and China will make its currency fully convertible in due course, and Shanghai aims to be an international center. For all that to happen, the capital account has to be open. Will it be attractive tomorrow? Maybe and maybe not. But given the longer term, China's economic growth is expected to be above most other countries. I'm sure many institutions will find China attractive, and, in order to diversify their portfolios, institutional investors will want to hold assets in China.

Q: The quotas China has given to foreign investors to participate in domestic bond and stock markets are far from being fully utilized. Do you think it's necessary to step up measures to open the capital market?

A: A quota is not meant to be fully used. The existence of the quota itself is restrictive because some people don't apply for it. Those who get a quota may not use it at all, or they might use some of it next year. You can't say because the quota is not fully used, you should not go any further.

Q: What about regulatory concerns? Many say China is not ready to open the capital market because of financial risks. What do you think?

A: Capital markets in many countries are not fully open, and yet they are all dealing with cross-border money flows. I think China can do that as well. If foreign investors wish to invest in China and it cannot be done openly, people will find other ways to do it. It's not just through trade settlement. It's only by having an open market that things can become more transparent.

Q: You mentioned attracting professionals. If you were coming to work in Shanghai, what would excite you most and what would you worry about most?

A: The prospect of working in a dynamic environment and the fact that Shanghai is gaining importance in China and globally are exciting for many. Twenty years ago there were very few foreigners working in China, but now if a bank in London needs to transfer some staff to Shanghai, people won't say, "No I don't want to go there." The difficulty may be the language.

Q: What about food and air quality?

A: I'm being fed very well. There is a lot of good food. Air quality has been fine during my visit, but maybe it is something China needs to address. Britain has spent a lot of time dealing with air pollution, and I think that will happen in Shanghai, too.

Q: A report released by the City of London last month said yuan deposits in the city declined last year while trade in the currency and other derivatives jumped significantly from 2011. What are the reasons? Are you concerned about the shrinking deposits?

A: Our concern mainly is not to build deposits but to finance trade. People may shift to other investments for higher returns. If an institution wishes to get yuan at some stage, it can either hold the money itself as a deposit or it can rely on the foreign-exchange markets. Arguably, if the foreign exchange market is working effectively, it means a business can buy foreign exchange forward and hedge. It has less need to hold the currency itself.

There can be a couple of reasons why deposits are coming down, but I don't think they are a constraint on the growth of the foreign-exchange market. The volume of yuan transactions is growing as more and more businesses come to realize the advantages of doing their business in yuan rather than in US dollar. We find some British institutions are even more familiar with doing their business in yuan than their China counterparts.

Q: China recently signed a 200 billion yuan currency swap line with the Bank of England. What's the impact of the deal on the offshore yuan market in London?

A: A currency swap line means that it may never be used, but it reveals strengthening cooperation between central banks in China and the UK. It's a boost to confidence of banks as liquidity is ensured.

Q: The yuan has been more volatile this year, compared with 2012. What trends have you observed so far and how may they impact financial markets?

A: We don't have data for this year. But primarily the more volatile the currency, the more people will need from a mature foreign-exchange market to hedge, to buy forward and do whatever they wish.


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