beyondbrics

When China makes a move, it does so quietly. That’s why three years ago when it became one of the largest investors in the UK stock market, no one blinked.

It’s also why few people noticed this week when a subsidiary of China’s sovereign wealth fund became the very first Chinese firm to join the London Stock Exchange as a member. But this quiet move could open the gates to a flood of Chinese investment in the UK and Europe.

The LSE announced – with a whisper- on Wednesday that China International Capital Corporation (CICC), a subsidiary of China Investment Corporation (CIC), had become the first Chinese company to join the LSE’s 400-plus member community. The move, done with little fanfare, is significant because it gives the Chinese investment bank the ability to trade directly on the LSE without going through a broker.

In an interview with beyondbrics Jin Liqun, chairman of CIC’s supervisory board, said of the move: “My impression is that the UK has been really very open to capital inflows and investment from other countries, which has been very good for the UK economy. Chinese companies are looking to IPO in London. It is a very positive sign and I think we should be encouraging (Chinese) companies to expand their business in Europe through the gateway of the UK.”

CICC declined to comment on the development or on its investment activities in the UK and Europe. But there are really only two big reasons for a company to become a member of the LSE. One is a matter of branding. The other is to secure discounts for volume trading.

CIC was set up in 2007 after the Chinese government decided to diversify the way it invests its foreign exchange reserves, worth $1,500bn at the time and more than $3,000bn today. CIC has $210bn under management – its initial $200bn allocation, plus $10bn in profits – of which half is allocated to Chinese banks and other financial institutions, and half overseas.

While the LSE membership will no doubt benefit the CICC and Chinese companies with plans to expand operations in Europe, investors on China’s mainland are still prohibited from investing in overseas stocks. When this changes, companies listed on the LSE could see a huge inflow from China. Anecdotally, insiders say there are approximately 100m brokerage accounts in China.

But don’t expect this to change quickly. “We want smooth sailing,” Liqun said.

Related reading:
China’s renminbi drive: more harm than good?, beyondbrics
Small steps to help reshape renminbi, FT
China wants the world to spend more renminbi, beyondbrics
Guest post: Redback will bring China closer to the world, beyondbrics
Lex: Renminbi internationalisation, FT