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UK/China Co-operation on Market Risk Management

The Rt. Hon. Alistair Darling MP,  Former Secretary of State for Trade and Industry
Beijing,  28 November 2006

I am happy to be in Beijing to launch the UK - China co-operation on managing risk.

During the recent UK/China Summit, Premier Wen told the Minister that relations between China and the UK were the strongest ever. I agree.

The strength of our relationship is very important to the UK Government, and business.

Tourism to China is growing rapidly – with over ½ million tourists from the UK visiting China last year.

In the world of business, our countries are creating stronger and stronger links –  $40 billion by 2010.

But we need to do more. China’s 11th Five-year highlights a number of priority areas for development where the UK has much to offer.

For example, in financial services, where the UK is a world leader; energy efficiency, where UK firms have much expertise; airport construction, where UK companies such as Arup are already making significant contributions. Education and other higher value good and services.

The inspiration for our joint venture on risk management comes from two compelling facts.

China today is a major player in the world’s commodities and financial markets. Britain is the place the great majority of the world’s companies come to conduct financial and risk management business.

We must now develop further our relationship as trusted partners.

China is now an integral part of the global economic system. Globalisation has given China access to international markets.

China produces 50% of computers;50% of the world’s textiles; 80% of the world photocopiers;60-70% of mobile phones;60% of digital cameras; and in a single factory in Guangdong 40% of the world’s microwave ovens.

And in 2004, Volkswagen already sold more cars in China than Germany.

But we should not fear the emergence of China. Far from it.

We welcome what China has to offer to the global economy. You will not hear from Britain calls for protectionism and new trade barriers. Protectionism will only lead to less trade and investment, lower growth and fewer jobs.

What you will hear is our desire for open, fair and properly regulated markets. And strong international economic co-operation to ensure the stability of the global economy.

Globalisation has brought with it rapid economic expansion on an unprecedented scale and economic co-operation amongst major global players, like China and the UK, is now more important than ever.

If we are to bring the benefits of globalisation to business both large and small and if we are to bring economic prosperity to all our citizens, then we must show effective leadership.

China shares with other economic leaders the responsibility for order, security and the stability of world markets.

We must learn to share knowledge, information and expertise. This desire for sharing is why I wanted to be here today to show the British government’s firm commitment to China.

In 1950, the United Kingdom was, after all, one of the first countries to recognise the People’s Republic of China.

Foreign trade accounts for over 60% of China’s GDP and exports have tripled since China joined the WTO in 2001.

For Britain, global trade and investment is vital to our economic well being. Britain receives more foreign investment than any other country in the world and China is now the 9th biggest investor in the UK.

Britain is also a source of capital. We are the largest investor from the EU in China with over 5000 joint ventures. For both countries international commerce is vital.

Only 30 years ago China’s foreign exchange reserves barely passed 2 billion US Dollars.

This year, China holds more than 1 trillion dollars in reserves. The Bank of China is actively looking to diversify the country’s foreign currency portfolio. How this transition is made matters to us all.

China faces the challenge of allowing the market to determine the exchange rate of the Renmimbi. The change may be gradual but the journey towards the market is, I believe, inevitable.

We managed the transition when Britain abolished exchange controls and allowed the Pound to float freely.  What has made the Pound solid over the last few years is sound macro-economic management not market interference.

We now enjoy sustained growth, low inflation, historically low interest rates and high employment. And we will do nothing to put that stability at risk. It is the essential foundation of our economic strength.

And that approach was underpinned in 1997 when the central  bank, the Bank of England, was given the independence to set interest rates. (To meet the Government's inflation target – currently 2%.   The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth  in output and employment.)

China has a powerful place in world trade. It is the second largest global exporter. From being an exporter of oil in 1993, China today imports almost 50 per cent of its crude oil. 4% of the world’s oil is bought by China.

China today is the world’s largest consumer of iron ore, steel, and copper.

These commodities are traded globally. London provides a market for global commodity traders and risk managers.

The UK is the world’s leading international financial trading centre.

The City of London’s range of services, from investment banking to commodities to asset management to insurance markets to wealth management. These are all world-class capabilities.

Add to this the services of legal and accounting firms and the result is a unique concentration of expertise.

London now has more foreign banks than any other financial centre.  Our capital city is the location for the head quarters of six of the world’s ten largest international law firms.

London has a pool of multi-national talent that no other centre can match.

London is the location for over 30% of the world’s foreign exchange business; 70% of the secondary market in international bonds; over 40% of the over the counter derivatives market; over 40% of cross-border equities trading; and 20% of cross-border bank lending.

I believe that the UK has strong markets because of three main reasons. First, is our approach to regulation…a light touch, proportionate regulatory system that balances market confidence and consumer protection.

Second, we have a system that is transparent.

The third reason is that we have institutions and companies that are in themselves strong.

Our approach to regulation in Britain is that rules must be based on principles. Regulations must be risk based. The simple reality is that it is not possible to have a rule for every situation. It is s system based on trust.

If people in a market understand the principles and live by them, they are not likely to bring harm to their trading partners.

In a world where your trading partner is not sitting in front of you but sitting facing a screen..where the voice you hear is not in person but on the phone..here the contract is verbal or digital and not signed by hand every time you deal..you must trust the system and your trading partner. You must believe in the same principles.

Having a well-regulated market in London alone is not enough. Global markets operate well when universal principles are understood and observed. The world needs strong systems and strong institutions.

No market can be transparent if market information cannot be exchanged freely.

Whether you are a financial institution in Shanghai or New York or a broker in Hong Kong or Dubai, or a currency dealer in Beijing or London. Each one relies on speedy, real-time market information and news.

You must be able to trust the data on your screen.

I was encouraged to hear Premier Wen’s reassurance when he said that ‘the Chinese government will ensure the freedom and rights of the foreign news media and foreign financial information agencies operating in China’.

Transparency on a normal business day is important but in a crisis, transparency is essential.

Shocks to the system, whether from a news item or a major business failure, can be absorbed by the market. But the market cannot act properly if operators not given the right information on time.

One of the reasons the Asian financial crisis in 1997 was difficult to manage was because of unclear information on companies, unreliable information on central government reserves and perhaps most seriously, a public that was unaware of the state of their economies.

Compare that to how London and other leading financial centres coped with some of their crises. When the bank, BCCI, collapsed, it was the central banks that found evidence of fraud.

Quick exchange of information and fast co-operation ensured that the global system remained strong.

Today, central bankers work hard at maintaining good relations with each other and see the value of having common standards.

In the case of Barings, the actions of one dealer in 1995 ruined what was then Britain’s oldest merchant bank. This was just nine years after de-regulation in the City of London.

The change in 1986 allowed securities, investment and commercial banking business to be undertaken by the same institutions.

The response to the Barings crisis could have been more central control and a heavier regulation. Instead, we took a different approach in the UK.

And in the year 2000 we set up the Financial Services Authority.   It’s main objectives are to maintain market confidence, public awareness, consumer protection and the reduction of financial crime. 

The rapid development of financial services in the UK after the Big Bang meant the breaking down of barriers between banks and other financial institutions.

So when we came to modernising our financial supervision and regulation, it was natural for us to adopt a model that brought the banking, insurance and securities industries under the supervision of one authority.

Although the FSA is accountable to the Government, it is an independent organisation that draws on experts from the market.

Five years ago, Enron, the US Company collapsed with major doubts emerging about its accounting practices. There was worldwide concern about company regulation.

We could have chosen to go down the US track and impose a regime like Sarbanes-Oxley. But we did not. Instead we maintain fair and a less litigious environment and a principle-based regulatory structure.

We chose to retain London’s competitiveness without compromising standards. We accept that there should be a convergence of international accounting standards. But these should be practical, pragmatic and most importantly, effective.

The London Stock Exchange continues to prosper and is clearly the international exchange of choice for business.

Chinese business has raised over 4 billion US dollars in the London market. 48 companies from China are listed on the Stock Exchange in London. Six on the main board and 42 in the Alternative Investment Market.

The Alternative Market is another good example of how smaller and new venture companies can raise capital without heavy-handed regulation.

The Government has a role in setting high-level strategy for markets to function effectively. Regulation is more effective if market based institutions are empowered to control their own conduct.

It is also for Governments to work for global trading systems that work not just for markets and business but also for the good of all citizens.

In my conversations with Commerce Minister Bo Xilai yesterday, I stressed how important it was to China, to Britain and the world at large to have strong international institutions.

China has benefited greatly by becoming a member of the World Trade Organisation.

Next year, China will be fulfilling its commitment to liberalise access to financial services. British businesses are playing a constructive role by bringing expertise and institutional knowledge to China.

This through partnerships with local companies, such as RBS with Bank of China and HSBC with Ping An Insurance and through growth of branch networks, as Standard Chartered is doing.

British participation in China’s development will be fully consistent with the key aims of China’s Eleventh Five Year Programme.

Today, less than 5 per cent of the population of China have life insurance. But demand is growing at 30 per cent a year. 

Chinese and foreign insurers will need to place the fast growing risks in global markets. Some of the world’s best insurance companies are British.

Of the world’s 20 largest reinsurance groups, 18 have a physical presence in London. Eight of the worlds top 10 insurance brokers and all of the top 10 reinsurance brokers operate in Britain.

China is a nation of savers. Savings represent nearly half of the country’s GDP. This means that the financial sector has to offer more than just deposit accounts.

But people will quite rightly not risk their savings if they do not trust the alternatives. Some of the answers can be found from examples of investment products in the UK.

Since 1997, China has been looking at different ways to provide pensions for its people.

Like all countries, there is a limit to how much the government can provide from taxation and state pension funds. British pension managers should be a good source of advice to China.

A major part of China’s development objectives is better health care. Britain still provides free health services at the point of delivery to patients.

But we have also benefited from innovative ways to fund and manage risk. Private Public Partnership schemes have allowed us to increase investment in the UK.

As part of the initiative being launched today, British companies will organise training and seminars to give Chinese businesses the opportunity to hear what our best practices are. Companies will offer technical experts to work along side Chinese partners.

British institutions will offer Exchange visits to the UK so that Chinese businesses can see for themselves how our systems work.

In the age of globalisation, it is crucial for Chinese companies to acquire the knowledge and the tools, such as corporate bonds and derivatives, needed to price risks and hedge in order to compete on a global basis.

Particularly as China continues its integration into the global economy via financial market liberalisation.

It is also important for Chinese financial services companies to up their game in risk management to keep up with the rapid economic development.

A properly functioning financial system should be able to connect savers and borrowers through the investment chain and help the management of risk in the economy.

We have already started to engage with China. Providing the National Development and Reform Commission and the China Securities Regulatory Commission with information on how the corporate bond market can grow in China.

We have hosted visitors from the NDRC, the China Securities, Insurance and Banking Regulatory Commissions and from the State-owned Assets Supervision and Administration Commission.

And, as acknowledged in the 5th UK-China Financial Dialogue, the partnership between UK (HSBC, Royal Bank of Scotland) and Chinese banks (Bank of Commerce, Bank of China) has helped introduce global best practices in managerial skills that have helped to enhance corporate governance and to raise risk management level.

Our offer of co-operation is of course also open to private sector enterprises in China.

I hope that after today, our co-operation will increase and that China will continue to see Britain as its natural partner for business.