Time to grab your ticket for when the yuan hits the tracks

PUBLISHED : Saturday, 26 June, 2010, 12:00am
UPDATED : Saturday, 26 June, 2010, 12:00am

In our reading of China, we tend to forget one important thing - its central bureaucrats come from a 'planned' economy. They jihua (plan).

It is not just about control but also ji, meaning strategy, and hua, meaning design. Rather than ad-hoc and piecemeal solutions, they prefer a long-term and comprehensive strategy.

In short, never read an individual announcement in isolation. This understanding will give a much better interpretation of the significance of the series of yuan-related moves announced in the past week.

Rather than an appreciation of the yuan, the banner should read 'the full-streamed launch of the yuan's internationalisation'.

Let's first recap what has happened.

On June 18, the People's Bank of China said it had decided 'to proceed further with the reform of the yuan exchange-rate regime to enhance its flexibility'. It was not about a one-off appreciation of the yuan, a bank spokesman added.

On June 22, the pilot programme to allow people to trade with foreigners in yuan was expanded from a handful of cities to 20 provinces. Furthermore, exporters are no longer restricted to settling trade in yuan with Asean countries, Hong Kong and Macau, but now can trade with the rest of the world.

The day after the announcement, Fang Xinghai, the director of the financial service office in Shanghai, said the city was considering the establishment of a system for overseas yuan holders to invest in the domestic financial market.

This echoed an earlier remark by Norman Chan, Hong Kong's central banker. He said a discussion with Beijing would be likely to bear fruit next month to allow the offering of yuan investment products in Hong Kong.

To Beijing policymakers, there is no such thing as a coincidence. These are all essential pieces of the plan to make the yuan an international currency. Since the US-triggered financial turmoil, Beijing has put the yuan's internationalisation high on its agenda. It is not about trade, but economic stability and the growth of the country into a genuine world power.

The sovereign debt crisis in Europe and the devastation of the euro have given Beijing the confidence and sense of urgency to speed up the process.

But cynics have wondered aloud how a currency, with its rate tightly controlled by the government and failing to reflect the country's economic conditions, can be accepted as a medium of international trade, investment and reserve.

This stigma has to be addressed, if not removed. The promise to allow greater flexibility of the yuan and to benchmark it against a basket of currencies instead of the US dollar is Beijing's answer.

The mounting pressures from Washington for a revaluation of the yuan and the looming Group of 20 meeting explain only the timing, not the decision.

Step two is about increasing the flow of yuan outside the country. This breeds the habit, the mechanism and the expertise for transactions in yuan. That is where the yuan trade settlement comes in.

The earlier pilot scheme on yuan settlement attracted 44.5 billion yuan (HK$50.9 billion) in transactions. For a scheme launched in July last year, that is impressive but not when compared with the country's US$2.3 trillion total trade.

The removal of geographic restrictions is a bold push. Bold not just in terms of the size of markets now covered but also in the speed of the change. In Beijing's policy-making terms, 11 months is no more than a blink.

But the real hurdle is the lack of investment products for yuan holders. Why would a foreign trader want to accept yuan without the means to preserve or increase its value? The appreciation anticipation may offer some motive for the moment, but that is no long-term solution.

That is where the remarks by Hong Kong and Shanghai officials come in. The much-talked-about yuan product is becoming a reality. Most important of all, it is happening at a much faster pace than many expected.

My reading does not come from insider briefing, but from the track record of Norman Chan. Our central banker is not known to be one with a big mouth, especially when it is about discussions with Beijing on the yuan. But on June 18, he talked a lot.

He was regaling a press gathering on a variety of topics, including an expansion of the yuan settlement scheme that would not be announced until a few days later, an ongoing discussion with Beijing about relaxing the use of yuan accounts and a completion date for the discussion about and the range of investment products that were likely to be introduced.

Chan may be eager to promote Hong Kong as the first yuan centre. But it is unthinkable that he has 'leaked' these without Beijing's approval.

Rather, his pre-emptive remarks should be read as a wake-up call to our financial industry which, except for a few in the loop, considered the launch of yuan products a far-away dream and were short on preparation.

After all, the more the innovative and attractive the yuan products are, the greater the interest will be in yuan trade settlements and the quicker the internationalisation of the yuan will occur.

I am not saying that the launch of yuan products will be a big bang. As with any reform in China, it will start with tonnes of restrictions and little fat for business.

What really matters is that the captain is on board and coal is added to the furnace. Let's hope our players have got their tickets. We don't want to be left behind when the captain blows the whistle.

Mind you, the Shanghai government held a press conference after Chan to tell everyone of its plan to allow foreign yuan holders to invest in the mainland bond and even equities markets. They are not just saying 'me too'.


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