Don't assume that offshore development of the yuan market is a sign that the currency is becoming internationalised, warns John Greenwood (pictured), the architect of Hong Kong's fixed exchange rate system.
'The key point about achieving convertibility is that domestic money and credit market liberalisation must precede convertibility,' Greenwood said yesterday. 'It would be a mistake to try to achieve convertibility only through creating an offshore yuan market.
'Domestic liberalisation comes first, but at the moment, I don't see that there is any urgency for domestic liberalisation. That's why all the experiments in the offshore arena will probably remain experimental,' said Greenwood, who is chief economist at Invesco Asset Management in London.
But Greenwood said that Beijing was retaining control over the domestic financial system through the use of rigid interest rate and credit quotas, rather than allowing the market to determine credit conditions.
His comments are also at odds with the upbeat reaction to HSBC's decision to issue the first offshore yuan bond in London, and the Chinese central bank's endorsement of London to position itself as a offshore yuan centre.
Greenwood also poured cold water on predictions that the yuan was on a fast track to full convertibility, arguing that yuan sourcing for the offshore market came from trade and foreign direct investments, rather than purely financial transactions such as share trading.
To be sure, all hot money inflows have to be approved by the State Administration of Foreign Exchange (SAFE), as Beijing seeks to maintain financial stability through controlling the capital account.