EU may lure UK's yuan business

A European Union flag is held in front of the Big Ben clock tower in Parliament Square during a 'March for Europe' demonstration against Britain's decision to leave the European Union, central London, Britain July 2, 2016. Britain voted to leave the European Union in the EU Brexit referendum. [Photo/Agencies]

European Union financial centers could gain a growing share of offshore renminbi activities after the UK's decision to leave the EU has triggered uncertainty regarding London's role, analysts say.

A departure from the EU is likely to limit Britain's ability to enjoy the EU's "passport" rules, meaning London-based banks and financial firms may no longer be able to distribute renminbi products in the EU or finance China-related deals in the EU without a physical presence.

London's offshore renminbi activities are the second largest, behind Hong Kong, but European financial centers like Luxembourg, Paris, Frankfurt and Dublin are all hoping to increase their share

None of the European financial centers have announced concrete plans or policies to attract renminbi activities, but analysts expect each to grab a portion of London's share by playing up their respective strengths.

Dublin could become a leading center because of its use of the English language. Frankfurt already has major trade with China. Luxembourg has a large concentration of renminbi-denominated funds.

"I would expect a slowdown of London-based (renminbi) activity due to the uncertainty caused by the Brexit vote, and personally I am convinced that new activity, new players and new products will to some extent not be located in London but will rather be located within the EU," says Christian Cornett, corporate partner at the law firm King & Wood Mallesons.

Andrew Carmichael, capital markets partner at the London-based law firm Linklaters, says London-based banks' challenges would depend on post-Brexit negotiations with the EU.

"Some institutional investors only want to invest in products that are traded on a stock exchange in Europe. Currently, these investors are able to invest in renminbi products, such as bonds, listed on the London Stock Exchange, but this may be more difficult under the new rules," Carmichael says.

The possibility of UK-domiciled funds no longer being eligible for EU distribution would lead to an increase in distribution of these funds in the EU financial center that has the biggest advantage in this area, says Nicolas Mackel, CEO of Luxembourg for Finance, who adds that Luxembourg has such an advantage.

"Although funds issued in other EU countries enjoy the same policy for distribution, Luxembourg's strength as a center for funds would give it an advantage over other EU financial centers to attract renminbi funds that were set up in London," he says.

By the first quarter of 2016, there were 175.8 billion yuan ($26.3 billion; 24 billion euros) of renminbi assets were held in Luxembourg-domiciled investment funds.

Also, there were 581 RQFII funds under the renminbi qualified foreign institutional investor program domiciled in Luxembourg in the first quarter of 2016, compared with 34 in the UK, 21 in Ireland and 32 in France.

Mackel says he also expects some financing and other support activities relating to Chinese acquisitions in Europe to shift into EU financial centers like Luxembourg.

"Some of the financing activities for Chinese acquisitions in Europe, which are currently financed by Chinese banks' branches in the UK, may in the future be financed by the European branches of the same banks," he says.

Ivan Chung, an associate managing director at rating agency Moody's, says Chinese businesses are likely to shift a part of their renminbi-related businesses to Europe only if there is an overall cost benefit.

"Business decisions may not be driven by just one or two changes. Each offshore RMB center will adjust its regulatory treatment and improve its business environment to attract more business and reinforce its competitive niche," Chung says.

Clara Ingen-Housz, a partner at Linklaters, says that if greater competition emerges between London and European financial centers over attracting Chinese business, this may be positive for China and the renminbi's rise.

"If financial institutions feel their offshore renminbi activities must be located in the EU, cities such as Paris, Frankfurt or Dublin will become more attractive to the financial services sector," Ingen-Housz says.

Cornett says he thinks Frankfurt also could greatly benefit from increasing renminbi activities. Renminbi liquidity in Frankfurt already is increasing, especially after the launch of the China Europe International Exchange in Frankfurt, and Brexit will accelerate this growth.

Some analysts say London still is attractive as a leading offshore renminbi hub because Brexit will not affect London's existing renminbi activity infrastructure, including the Bank of England's renminbi swap arrangement with the People's Bank of China and the function of London's renminbi clearing bank. In addition, greater flexibility following Brexit may even allow the UK to increase trade flows with China, building up the foundation for more offshore renminbi activities in London.

cecily.liu@mail.chinadailyuk.com