No time to crow, there's work to do on offshore yuan centre
Much has been said about Beijing's choice of Hong Kong over Shanghai as the country's only offshore yuan centre. Victory is the word widely used.
However, before popping open the champagne, I would like to share a story with you.
It was 1994. I was visiting the newly listed Shanghai Petrochemical with a group of Hong Kong journalists, fund managers and analysts. The last stop was the Shanghai Stock Exchange.
Nobody was excited. Back then, the bourse was not even a dot on the financial map. It had only 172 listed companies and a daily turnover of no more than 50 million yuan (HK$57.32 million).
The exchange was housed in an old building that used to be a hotel. In a dimly lit meeting room we met the then general manager, Wei Wenyuan. He gave us a briefing and then there was a pregnant pause.
A fund manager broke the silence by politely asking on which country the exchange had been modelled.
'We don't copy anybody. Shanghai is one of the world's first exchanges,' said Wei.
This is the kind of pride that is behind Shanghai's fight to become the country's core financial market versus Hong Kong.
The city had an international exchange in 1904 when Hong Kong was a relative backwater, a small trading post in the British Empire. The bourse was closed by the communist regime in 1949. They are determined to make up for time lost.
It's a sentiment shared not just by the Shanghainese but also by the mainland elite, including many regulators who would prefer to see a stronger domestic market to give them more clout.
They doubt Hong Kong - a system full of foreign influence - can be trusted with business that matters dearly to the country's financial security.
It is against this background that Hong Kong has been lobbying in the past few years. Those lobbying efforts reached the very top in Beijing. The core message was that our system was rock solid during the 2008 financial crisis and pointed out the importance of the synergy between offshore and onshore yuan centres.
Then came the surprising speech by Shanghai deputy mayor Tu Guangshao on July 21 in which he said Shanghai was to become the country's onshore yuan centre, leaving offshore business to Hong Kong.
The optimists had every reason to be jubilant. The clarification of roles indicated trust in Hong Kong's financial security and pushed aside the Hong Kong-versus-Shanghai debate that has been dragging on for years.
More importantly, it implied that a final seal had been put on the country's grand plan for yuan internationalisation. With that would come greater impetus for exchange relaxation and growth of yuan business.
But in China, it is not just about what Beijing says. There have been signs of bitterness and reluctance among the bureaucrats over the new role division.
Instead of being 'formally' announced, the news was 'blurted out' by Tu in a paragraph buried in his speech, they said.
The paragraph reads: 'Hong Kong is studying and promoting the development of an offshore yuan centre. This is very conducive to the 'going-out' of renminbi. In the process, Shanghai should focus on building up an onshore financial system. We should co-operate.'
In reporting his speech, the Xinhua News Agency headlined it: 'Shanghai and Hong Kong to co-operate on the going out of renminbi,' playing down the 'new' role of Shanghai.
That role is just too difficult to swallow for many. The Wei-style pride and distrust will continue to get in the way.
Rather than a victory, Hong Kong should view the new policy as a narrow window that may be shut at any time. The length of this exclusivity depends on only one thing - how well Hong Kong does its job.
It sounds like a no-brainer. Who will miss this once-in-a-lifetime opportunity, be it the government or the private sector?
Well, that's not what our track record says. A good example is the Closer Economic Partnership Arrangement which gives Hong Kong unprecedented access to various industries and professions on the mainland.
Seven years after the signing, there has not been much advancement. Mainland officials have openly criticised us for failing to make best use of the policy.
The main problem has been the Hong Kong government's failure to educate the business community on the arrangement or lobby support from mainland regional governments that control the ultimate access.
'You don't just get the policy and then sit on it,' said a mainland official.
In November last year, we heard of a similar disappointment, this time from a deputy governor of the People's Bank of China who complained about the sluggish pace of yuan trade settlement a month after its inauguration. He came to town to persuade the authorities and the banks to give the yuan business a bigger push.
Earlier this year, there was another embarrassment. The Hong Kong Monetary Authority made a yuan-related policy announcement in March that left bankers complaining that they did not understand its full meaning until months later - the meaning being: 'You are free to do whatever yuan business you want in Hong Kong as long as the money does not go back to the mainland.'
These are the kind of misunderstandings we can no longer afford.
Instead of 'crowing' over our newly granted exclusivity on yuan business, there should be a concerted effort by the public and private sectors to get down to some serious work on the building of an offshore centre.
It is about having a thorough understanding of the country's yuan policies (not just those on paper); educating the industry about their full potential; building a hand-holding relationship with Shanghai and other mainland powerhouses, and breaking down the barriers in our financial infrastructure.
Just remember, somebody is sitting in the wings waiting for us to make a mistake.