Yuan currency, two systems. Time to ditch 'foreign renminbi'
Does China consider the renminbi traded in Hong Kong and overseas a domestic currency or a foreign one?
I ask this question - academic, if not incomprehensible, to some - to determine the success of the yuan's internationalisation. You may find the question ridiculous but this has exactly been the bone of contention in Beijing, and it has become a major issue in the development of yuan-denominated products in the past months.
The good news is that the debate is coming to an end and signs are pointing towards further liberalisation.
In China's corridors of power, naming a thing is always important because it will determine who has a say on it and who cares about it.
Ever since the launch of the internationalisation campaign in 2009, renminbi outside mainland China has been called a 'foreign currency'. That gives the State Administration of Foreign Exchange full control on the inflow of yuan to the mainland.
This is crucial for two reasons. First, the job of SAFE is to control the inflow of money to the country. Control has been the focus of its officials ever since SAFE came into being. They are rated by their success in ensuring as little hot money enters the country as possible, not by how widely used the yuan is outside China.
Unsurprisingly, almost a year after the issue of the first yuan bond, SAFE has issued no rules or regulations on the repatriation of yuan proceeds back into the country. Fewer than a dozen well-connected issuers have been granted 'special approval' to send their money home for development.
That brings us to the second concern. What is the point of issuing yuan bonds and stocks if the money raised cannot go home for expansion, other than for a bet on yuan appreciation? Similarly, what is the point of holding yuan-denominated investment products if the issuers can offer you no part in China's growth but simply a currency bet?
Without a clear path for sending yuan proceeds home, no yuan product market of any size, depth or diversity can be developed. Mere expectation of appreciation works in the short run to convince people to sit on the yuan. A vibrant market of yuan products, is however, the long-term solution.
The stagnation has fuelled the growing pressure for a 'redefinition' of renminbi in Hong Kong or overseas as domestic currency. All renminbi originated from the mainland and their supply is controlled by mainland authorities, the supporters argue.
Why will the definition make a difference? The short answer is: if the yuan here is ruled not to be a foreign currency, its repatriation will no longer be part of SAFE's turf.
But what difference will it make as long as the money is given approval before going home? Suffice to say, in China it does make a difference. Let's not forget the famous saying among mainland bureaucrats - one's rear end leads to one's brain.
Imagine for a moment that the matter is moved into the hands of the Monetary Policy Department II, under the People's Bank of China and the Ministry of Commerce, as is currently being contemplated by Beijing, according to sources.
Both the department and SAFE fall under the jurisdiction of the central bank. Set up in late 2009, the former, however, is specifically charged with promoting renminbi internationalisation. Its task is to study overseas usage of yuan; to formulate policies on cross-border yuan business; and to assist related authorities in the development of proposals for the convertibility of yuan under the capital account.
As for the Ministry of Commerce, its performance is not measured by the greater use of yuan overseas. However, one of its major jobs is to promote foreign investment in the country.
In short, both authorities have a unified interest in making the repatriation of yuan proceeds to the mainland a reality, while SAFE does not. The job of their officials is to make it happen, or at least not to block it.
Of course, it would be naive to expect the door to swing wide open under their management. Every liberalisation will have to be balanced against the country's economic and financial stability.
However, there will at least be a good chance of seeing a clear set of rules and regulations, no matter how restrictive, for repatriating yuan for bond or stock issuers to follow.
It now falls to the state leaders to decide. While nothing is final yet, there are increasing signs that changes are on the way.
In a work plan released in early March, the central bank said one of its five tasks this year was to achieve an 'orderly expansion of the inflow of renminbi'. Until recently, several central bankers had publicly disputed that there was any need to send yuan proceeds home in order to make yuan internationalisation a success.
But the clock is ticking and state leaders know it well. The appreciation expectations and financial disorder in the West have presented China with a rare opportunity to lure foreigners into using its non-convertible currency.
It is about removing the inertia; setting up the mechanism and giving yuan internationalization a jump start before the window closes. There is little time to waste.
What this demonstrates is that the challenge of yuan internationalisation is a two-pronged one. There is the difficulty of selling a brand new product, called the yuan, to foreigners.
Then there is the problem of finding the right men and women among a bureaucracy that has been trained to control - and nothing else - who are capable of turning their talents to market development.
I am not sure which is the bigger challenge.
Correction: My April 12 column wrongly said China's next leadership reshuffle was due this coming winter. It is, of course, due in autumn 2012.