Yuan deal great for Hong Kong, but few others care
There has been much excitement over the new yuan deal. Day after day we have been reading in the local press about yuan-denominated bonds, insurance policies and other investment products, and about Hong Kong's bright future as the major offshore trading centre for the mainland currency.
But the rest of the world doesn't seem to know what's going on.
The accord signed between the Hong Kong Monetary Authority and the People's Bank of China on Monday was not even reported in the international financial media the next day. Instead, the Financial Times and The Wall Street Journal focused on China becoming the biggest energy user and polluter.
Technically speaking, the new deal is a big deal. It removes the structural hurdles for the greater usage of yuan at the corporate and household level, making yuan investments possible in Hong Kong.
Why isn't the excitement shared outside the yuan loop, i.e. Hong Kong and the mainland?
I asked about. The short answer is perhaps best summarised by my American editor. 'Coming from a free economy with convertible currency, I just don't get it. How can internationalisation work for a non-convertible currency?'
A Hong Kong-based Kiwi fund manager offered an excellent elaboration in an e-mail.
'I think for the Hong Kong economy, which makes enormous profits from the intermediation between [yuan] and international currencies - either legally or otherwise - this is a very relevant product/service, because we are handling RMB daily and are comfortable that we can buy/sell at will across the border.
'If I am a Hong Kong business, I can take suitcases of cash back and forth across the border and I probably have businesses on both sides of the border that can invoice whatever export-import value I want. In other words, I have 'full convertibility'. So I think HSBC and Standard Chartered are right to be excited about this.
'But further afield? I personally do not see how say a European, Russian, Indian or Middle Eastern business would take on the risk of transacting in [yuan] (when anyway it's pegged to the dollar). Paying in [yuan] (where do they get large quantities of [yuan] from?) or being paid in [yuan] (and getting low interest rates determined by the PBOC not the money market).
'A holder of [yuan] is entirely at the whim of PBOC's rules on repatriation, settlement and rates. Just as the PBOC can make an arbitrary decision on the value of the peg, so too it can set the conditions of exchange on a whim.
'If the [yuan] becomes a major settlement currency (beyond the immediate region) in its current status, frankly I will be astounded.
'Of course, hopefully the status of the [yuan] may change. I think the world will welcome it as a new major reserve currency, and it befits China's status as the world's second-greatest economy.
'But China can't have it both ways, and 'internationalisation as a settlement currency' doesn't cut it either. While it may be politically satisfying to play the rhetoric about 'challenging the hegemony of the greenback, etc', China doesn't offer a currency that anyone wants - or is able - to buy as an alternative.'
Well, this fund manager is no greenhorn. Like many of you, he has been in the industry and the city for more than a decade. And he doesn't get it.
How about those outside the region? Their grasp of the new deal will be pivotal to making the yuan an international currency.
Here is what I have gleaned from various government and banking sources.
First, there is no longer any need for businessmen to haul suitcases of yuan across the border. All you need to do is to open a yuan account on the mainland and one in Hong Kong and then remit funds between the two. (Leave the suitcases for those involved in dodgy business who don't want any fund flow trail.)
Second, as a holder of yuan funds in Hong Kong, you are only at the 'whim of the PBOC's rules on repatriation, settlement and rates' should you want to remit those funds into and out of the mainland. Once yuan funds reach Hong Kong, the handling of them will be governed by local rules so long as they do not touch the mainland border.
In fact, deputy PBOC governor Su Ning has said: 'We regulate and monitor the cross-border flow of [yuan]. Once the money is outside, its usage and regulation is beyond our reach.'
'In other words,' said a source, 'a Brazilian trader keeping [yuan] trade receipts in Hong Kong can choose to do whatever he/she wants with the money (even remitting the money to Brazil when a [yuan] clearing platform is established in that country).'
This unprecedented freedom has already got a lot of Indian, Russian, and Latin/South American companies interested in getting their hands on yuan funds. Of course, most of them are looking at yuan appreciation, not only against the US dollar but most major currencies.
This may sound too opportunistic or too fragile a basis for the long-term development of the yuan regime. But can you think of a better window for Beijing to push a non-convertible currency into foreigners' hands?
At a time when people remain cautious about the US and European economies' outlooks, and when expectation of the currency's appreciation is attracting unprecedented interest in yuan-asset holding, there is a big chance of success.
It is hoped that over time, once the yuan becomes a more accepted currency for cross-border transactions, there will be a natural demand for it and some corporations will want to start accumulating a pool of yuan liquidity ahead of other currencies.
With this increasing liquidity pool will come the investment, the pricing curve and a better understanding of market behaviour for Beijing to prepare for further liberalisation of the yuan.
So, Hong Kong is to act as a buffer for people offshore to punt on the yuan's appreciation.
How big will China allow this trade to be?
I have no answer to that. All I know is that less than a year ago, regulators and bankers told me there was zero chance that Beijing would allow businesses to open yuan accounts indiscriminately in the near term.
Yet, with this week's new deal, it did.