BEIJING/LONDON (Reuters) - Britain has taken a big step closer to winning the battle to become the main offshore hub for trading in China's currency and bonds by offering less stringent rules for Chinese banks setting up in London.
Tuesday's announcement of China's agreement to open up its markets for British-based investors represents its latest move to establish the yuan as one of the world's heavyweight currencies and underscores Britain's determination to win a large share of the potentially massive Chinese market.
China's carefully managed programme for foreign investors will be expanded beyond Hong Kong for the first time, giving London-based investors the right to buy up to 80 billion yuan ($13.1 billion) of stocks, bonds and money market instruments.
Britain, meanwhile, will allow Chinese banks to set up wholesale banking branches in London, easing regulations imposed after the financial crisis. Wholesale banks cater to other financial institutions and large corporations.
London and Beijing will also allow the yuan to be traded against sterling directly, rather than through the dollar, thereby reducing transaction costs.
The moves were announced during a visit to China by Britain's chancellor George Osborne, who is seeking to help London retain its leading role as a financial centre in the face of competition from Singapore, Frankfurt and other cities vying to be approved by Beijing as a designated centre for clearing yuan trades outside of China.
"The Chinese currency, the renminbi, is not terribly well known in Britain at the moment. But over my lifetime I think it's going to become almost as familiar as the dollar, and I want British businesses involved in trading it, in investing it," Osborne told BBC television in China.
He said that Industrial and Commercial Bank of China (ICBC) will launch a 2 billion yuan bond in London next month, making it the first China-headquartered bank to raise capital directly in Britain.
Though London accounts for 62 percent of yuan trades outside China and Hong Kong, according to data from financial services provider SWIFT, analysts said that the latest move will give the renminbi a firmer footprint in Europe and strengthen London's platform to develop the offshore RM (renminbi) bond market.
Osborne also said that Britain's financial regulators will start talks with Chinese banks in London to open branches for their wholesale businesses.
Since the financial crisis, Britain has required most overseas banks to set up their UK operations as "subsidiaries" rather than branches, thereby providing greater protection for depositors and taxpayers.
Subsidiaries have to comply with tight standards on capital and liquidity, while branches are treated as extensions of the overseas bank, leaving the British regulator with limited control.
The move will be welcomed by Chinese banks that were reported to have complained last year that the rules made it hard to operate in Britain, prompting them to move much of their business to Luxembourg.
But it also drew criticism that Osborne is going against the trend of requiring tougher rules on capital adequacy and against money laundering.
"He (Osborne) can't do this without flatly contradicting what he has done in other areas," said Bob Lyddon, general secretary of IBOS Association, a London-based alliance of large international banks in Europe and the Americas.
"Do we really want banks that are going to operate on very low capital, because they are not going to put much capital into the branch, and then start spinning a big wheel here. Isn't that what we were meant to be getting away from?"
CityUK, which promotes the UK financial services sector, welcomed the move, which it said could increase funding for British infrastructure projects and investment in other sectors.
ICBC is the largest bank in the world by market value and China's top five banks all rank among the world's biggest lenders.
Bank of China already operate a branch in London, but ICBC, China Construction Bank, Agricultural Bank of China and Bank of Communications all operate as subsidiaries.
Reporting by Koh Gui Qing in Beijing, Saikat Chaterjee in Hong Kong and Steve Slater and William Schomberg in London; Editing by Raju Gopalakrishnan and David Goodman