Li Keqiang is no Santa Claus: Christmas hasn't come early
If you were to judge from the headlines over the last couple of days, you would get the impression that Li Keqiang is some sort of Santa Claus figure, sweeping into town on his reindeer-hauled sleigh and magnanimously doling out unseasonal presents to all the well-behaved little boys and girls of Hong Kong.
In reality, of course, the vice-premier is no such thing. The handful of yuan liberalisation measures he announced here yesterday were not intended as gifts for the loyal citizens of Hong Kong. Instead they were meant to advance the central government's policy of opening China's capital account - gradually and under tightly controlled circumstances - so that Beijing can benefit from the power and prestige officials believe will accrue from greater international use of the yuan.
The key words here are 'gradually and under tightly controlled circumstances'. Although Li's announcements have been hailed as the most significant opening of the mainland economy for years, all they really do is widen by a fraction the existing crack in the mainland's capital controls.
Even so, the measures are important. Just don't expect a huge short-term impact.
Take the long-awaited plan to allow Hong Kong holders of yuan to buy mainland-listed securities through the qualified foreign institutional investor, or QFII, scheme.
At first it sounds like a major breakthrough, granting Hong Kong investors access to the mainland's stock markets. But when you consider that the initial investment quota has been set at 20 billion yuan (HK$24.4 billion), or just 3.6 per cent of Hong Kong's yuan deposits at the end of June, it becomes clear that the new facility is nothing more than a very tentative experiment.
In any case, it isn't clear why Hong Kong investors would want to buy mainland-listed stocks right now. As the first chart shows, A shares are currently trading at their greatest premium to Hong Kong-listed H shares for more than a year. Investors would be better off buying the equivalent stocks listed in Hong Kong. (As this column has pointed out before, in equity investment it is not the currency of a company's shares that matters to investors, but the currency in which its earnings are denominated.)
Currency does matter to debt investors however, which means the new QFII facility is likely to be far more attractive to yuan bond buyers. Despite the recent rash of yuan-denominated 'dim sum' bond issues in Hong Kong, the outstanding pool of yuan bonds amounts to just 20 per cent of the city's yuan deposits; not nearly enough to meet demand.
As a result, as the second chart shows, the yield offered by dim sum bonds is just a fraction of the return investors would get in the onshore market through the new QFII channel.
That yield gap may narrow over time. In what may eventually prove the most significant of yesterday's measures, Li announced that Beijing would allow non-financial companies from the mainland to issue yuan bonds in Hong Kong.
Given the cheap funds available, there will be no shortage of eager would-be issuers. Once again, however, at just 25 billion yuan the issuance quota set by the mainland authorities is tiny. Approvals to issue will be granted on a case-by-case basis and will almost certainly be restricted to well-connected and state-owned companies. So although allowing mainland companies to issue yuan debt in Hong Kong sounds like a major liberalisation, this will be a very tightly controlled market.
Similarly, it would be a mistake to get too excited over Li's announcement that mainlanders will soon be permitted to invest in the Hong Kong stock market via an exchange-traded fund, or ETF, to be listed in Shanghai.
At the moment details are scarce. But we can be confident that Beijing is not about to allow a free flow of money out of the mainland and into the Hong Kong market. Once again, we can expect a tight quota, ensuring that any flow of funds across the mainland's border is restricted, controllable and takes place very much on a trial basis only.
All in all, then, the measures Li announced yesterday hardly amount to a major deregulation of cross-border yuan flows.
All that's happened is that the door to the mainland's capital account has creaked open by another fraction of an inch. That's positive news, but it doesn't mean that Christmas has come early for Hong Kong this year.