British Prime Minister David Cameron shakes hands with then Chinese vice premier Li Keqiang at the UK-China Business Summit during his maiden visit to China in November, 2010. [Xinhua photo]

Thriving trade, soaring investment

In the past half decade, U.K. exports to China have doubled to $25.8 billion, which makes the Chinese mainland one of Britain's largest markets. From London's standpoint, the trade potential remains huge.

As the U.K. economy is coping with substantial economic challenges, Cameron is eager to take advantage of the perceived China potential. In China, the role of net exports has been halved since the onset of the global crisis, but is vital to Chinese manufacturers.

In 2012, the Sino-U.K. trade increased to more than $63 billion at 7.5 percent growth year-on-year. Yet, it accounts for just a part of the full bilateral economic relations. Last year, Chinese investment in the U.K. soared by 95 percent, which makes Britain the top recipient of Chinese investment in Europe.

During his October visit to China, Chancellor George Osborne pledged to open the doors to inward investors, especially to Chinese banks that seek to open branches in London.

What makes the bilateral relations so important to both London and Beijing in the coming years is the proposed role of the City of London as China's financial beachhead in Europe.

A balancing act

As reflected by China's nascent financial deregulation, Shanghai's free trade zone and the central government's impending reforms, Beijing seeks to build a more advanced financial system. Resting on a fully convertible renminbi, that system is needed to support more sustainable growth and a rudimentary social model for the Chinese people.

These reforms require the increasing sophistication and internationalization of the Chinese financial sector, which is vital to support China's shift toward consumption. When ordinary Chinese feel more secure about their social welfare, health services and education, they are also likely to consume more.

When the U.K. offers to treat Chinese banks operating in Britain as branches, which are subject to Chinese regulation, rather than subsidiaries, which are subject to British regulation, both Chinese banks and U.K. economy can potentially reap great benefits.

As Cameron's government is encouraging China to develop financial institutions with light regulation, it sees itself as supporting Chinese reforms, preparing China for increasing access of foreign investment while facilitating the internationalization of the renminbi.

On the other hand, critics argue that British policymakers may be more eager to encourage Chinese banks to take risks, when it benefits the financial markets, than to protect Chinese financial flows, which should benefit Chinese savers.

For all practical purposes, the internationalization of Chinese banks is a balancing act in which opening-up policies are likely to be coupled by adequate control.

As future prospects in the U.S, Europe and Japan remain haunted by soaring sovereign debt, the sooner China can exploit the renminbi's potential as an international reserve currency, the faster institutional investors worldwide can diversify their portfolios.

In the ideal scenario, the mainland's government debt is positioned to become a critical global benchmark asset.

Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, see www.differencegroup.net