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Chinese Banks Ready for RMB Internationalisation?

Volume 3, 2016

Sir Gerry Grimstone Chairman, Standard Life;  Deputy Chairman, Barclays

Date of speech: May 24, 2016

“Looking ahead, it’s easy to see why the United Kingdom government, the City, senior practitioners such as myself, are attaching such importance to China.  It is with the expectation that, at some point in the future, China will be the world’s largest economy.  It’s very, very important that London positions itself to be the international offshore centre, the international intermediary for China.

And it’s not accidental, therefore, that this is a topic that the British government, at its highest levels, pays so much attention to.  And it’s also clear because of the advantages to China, as well as to London, why the same thing goes for the Chinese government.

One day the renminbi will not just be in the top five of global currencies, it will certainly be in the top three of global currencies, sharing equal status with the US dollar and the Euro. 

London at the moment accounts for more than half of all global offshore trading in the renminbi. London’s position in the renminbi market is greater than all renminbi centres put together, not least because of the activities of ICBC.

What are the consequences of that going forward? I think it’s underestimated what the consequences are for Chinese banks, such as ICBC, of this globalisation of the renminbi and the internationalisation of the renminbi.
 
By 2049, the 100th anniversary of the foundation of China, I expect Chinese banks to be amongst the world’s global banks.  Not just very large in China, obviously, but very large in their global positioning as well.  And this is helped by the fact that European banks, such as mine, I’m the Deputy Chairman of Barclays, we are pulling back from our global operations.  Barclays is in the process of exiting 26 countries around the world, countries where we’ve had business for many, many years.  And I expect that vacuum will eventually be taken up by the Chinese banks, driven by the internationalisation of the renminbi.

So, it’s not for me to give (ICBC Chairman) Mr Gu advice, he’s a very fine banker.  But what do I think Chinese banks have to do to grasp this huge opportunity presented by the internationalisation of the RMB?  First, as we heard earlier, they do have to become more market-oriented.  And when they are carrying out functions for the State, the very, very important functions they do for the State, they will have to increasingly, I think, do it transparently, and as a discreet part of their operations; as opposed to being mixed in their day-to-day operations.

Their international risk frameworks will have to be brought up to global standards, because this will allow them to take more risks.  At the moment, we see Chinese banks not taking as much risk as we would expect them to take, given their standing and their status.  And I think this is purely because their global risk systems are not yet fully advanced.  Their top management, who I’m absolutely certainly will still be Chinese in the year 2049, will all have spent time working overseas, living overseas.  So we will have international expertise at the top of the Chinese banks.

They will become more confident in employing talented local people in their international operations.  The European banks, the American banks have always been very confident in employing people at the highest level from outside their core country.  I think China will go down that route eventually as well.  To do that, they would have to understand how to retain expatriate employees, and how to incentivise them, going forward – neither of which is easy for Chinese banks.  I’m sure they will become major players in the capital markets, not just in relation to China business, but more generally to global flows.  And I think they will develop a much greater advisory capability to help Chinese companies go global. 

They will almost certainly run their international businesses from London.  It’s no accident that American banks, European banks, run their international businesses from London.  Ten years, 20 years from now, I expect Chinese banks to run their international businesses from London.  As for European banks, of course we’re all very excited, very interested in the renminbi business, and we will surely capture a slice of that.  But I think increasingly, we will look to partnership with the major Chinese banks, to do things together with them.

So I think the golden decade of UK-China relationships is going to bring great opportunities for both sides.  I think it will be a great benefit to London.  And I think that will be at the expense of New York, and also, I would say, Hong Kong.  I think London will eventually become the dominant offshore financial centre for the renminbi.”