Last year’s visit by China’s President Xi Jinping to Britain was an extraordinary milestone for diplomatic relations between the two countries.
Before being seen sharing some Home Counties fish and chips, Prime Minister David Cameron and President Xi committed in a joint statement to creating “a global comprehensive strategic partnership for the 21st century”.
Britain further outlined a plan to utilise Xi’s “One Belt, One Road” policy, which aims to turn the old Silk Road into a modern trade route across Asia to the Middle East and Europe.
Besides all the pomp and circumstance, there were a raft of agreements on trade, technology, culture and finance.
The City of London treasures its reputation as one of the leading financial centers in the world, but what does this mean for investors from China and Britain, and how can they benefit from Britain’s pivot toward Asia’s greatest power?
The elasticity of ‘One Belt, One Road’ and the power of the renminbi
The Financial Times recently labelled the advocates of the “One Belt, One Road” (OBOR) slogan as suit-clad, sober-sided politicians, bank analysts and economists, not the young idealists of Mao’s generation.
The policy’s flexibility is its strength, although we are still waiting for the full plans to come to the fore.
The renminbi is getting more attention from the London capital market.
In October, China’s central bank made its first sale of debt on London’s markets, drawing orders of more than 30 billion yuan (US$4.56 billion).
It’s part of China’s drive to make the renminbi an international currency, and it consolidates London’s position as a global financial center.
The Chicago Mercantile Exchange also announced that its London trading center would offer offshore yuan futures, allowing financiers to trade and hedge on movements in China’s currency.
The move will bring to London a practice that was previously conducted through Hong Kong and will further strengthen Sino-British economic ties.
Following Xi’s visit, we have seen the immediate positive reactions in the market.
The initial figures are striking: a new US$40 billion Silk Road Fund will support private investment, and US$100 billion will be distributed from the new China-led Asian Infrastructure Investment Bank.
OBOR will turbocharge the renminbi, emphasizing the Chinese currency’s role as a vehicle to raise capital in overseas financial centers to fund railways, highways, ports, airports and other infrastructure projects across Eurasia.
This is further evidenced by the International Monetary Fund’s decision to include the renminbi in its Special Drawing Rights (SDR) group, which means IMF member countries can now borrow money at favorable rates from the IMF’s reserves in yuan as well as any other SDR currency.
Ensuring the money reaches the right targets means calling on the expertise of those who understand how to maximize the potential of capital flows.
We are seeing Asian investors’ continued and stronger focus on real estate and infrastructure investments.
This has been demonstrated by Jersey’s alternative funds business, which has grown 15 percent over the past 12 months.
A more moderate China dream
Investment in Chinese mainland markets, already strong, has been buoyed by the Stock Connect “through train”, launched at the end of 2014, giving Hong Kong-based investors access to the Shanghai market and vice versa, but the early flows were nearly all northbound, as investors chased the China growth story.
News of moderating economic growth caused a dip of 30 percent in the mainland stock markets, propelled by investors’ fears about their highly geared holdings.
But these gyrations are part of China’s transitioning to a new economic system and will allow a reset of valuations to more sustainable levels.
The devaluation of the renminbi will make Chinese exports more competitive and kick-start the economy.
And investors in 2016 will be looking for extra policy stimulus to boost other emerging markets, particularly commodity producers.
With more flexibility in the market and in accessing capital, outbound investment will be high on the agenda for Chinese investors.
As an international finance center, Jersey is seeing fund and corporate vehicles becoming increasingly attractive, as well as the listing of equity and dim sum bonds and the structuring of offshore yuan products.
Due diligence, money laundering and tax reporting are still high on the agenda, and Jersey’s robust approach in all of these areas is finding considerable favor among Asian advisers.
Last year witnessed a vital shift in China and Britain’s respective long-term growth strategies, offering investment opportunities for both countries.
As a result, there will be sustained growth opportunities for the alternative funds industry.
However, investors from Asia must remain cautious and assess the economic viability of their investments, in the light of continued economic volatility, shifting investor appetites and regulatory fragmentation.
– Contact us at [email protected]