China Stock Turmoil 2015
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People’s Bank of China Governor Zhou Xiaochuan attends a session of the World Economic Forum (WEF) after his reported article on the Shenzhen-Hong Kong stock connect roiled the markets. The PBOC clarified the article came from excerpts of a speech delivered six months ago. Photo: AFP

NewHow Shenzhen-Hong Kong stock connect blunder reveals central bank governor's ambition to take charge of China’s capital accounts reform

PBOC’s error highlighted the overlapping responsibilities of China’s authorities

Yu Xie

Zhou Xiaochuan is China’s longest-serving central bank governor and his ambition could provide a powerful goad for financial reform of the country’s capital markets.

On Wednesday, his remarks in an article that the Shenzhen and Hong Kong stock exchanges would forge a link before the years’ end took the markets by surprise and caused gyrations in what eventually turned out to be a PR blunder by the People’s Bank of China (PBOC).

While analysts said this was just the latest case showing the overlapping and contradictory responsibilities of departments in China’s government, there is no mistaking that Zhou is a man in a hurry to pry open China’s capital markets before his retirement which could come at any time.

Stocks, especially in Hong Kong, shot up because the Shenzhen-Hong Kong stock connect has been widely consigned by market players to start in 2016 after a massive rout scuppered a rally that hoisted shares in the city and on mainland China to a 7-year peak in June.

The PBOC clarified during the lunch break that Zhou’s comments were actually an extract from a speech he delivered nearly six months ago to staff on “party education”.

A key industry source very familiar with the progress of the scheme said that stock market watchdog, the China Securities Regulatory Commission was still working on the scheme and was not prepared to issue a timetable to roll it out.

A senior analyst with a state-owned brokerage, said the dramatic incident just showed how PBOC and CSRC have overlapping responsibilities, but the bank is more aggressive than the latter in terms of pushing for reforms. It looks the CSRC is the direct designer and regulator of the “stock” connect. But the settlement issue, related to cross-boarder capital flow, is under the supervision of the PBOC.

An elderly Chinese man walks past the headquarters of the People's Bank of China (PBOC) in Beijing, China, Tuesday, March 11, 2014. China's central bank governor Zhou Xiaochuan said Beijing might finish the process of easing controls on interest rates within two years and market forces will set the pace for allowing use of its tightly controlled currency abroad. Photo: AP
“Zhou Xiaochuan is absolutely more close to the party’s core deciding body, while the CSRC is marginalized,” he said.

Erwin Sanft, chief China strategist at Macquarie, said PBOC and the Ministry of Finance are more senior, powerful entities who are the major drivers of financial reforms in China.

“They have been, since the beginning of the year, and continue to be, driving financial reform and deregulation. They also didn’t take active roles in the stock market intervention,” he said.

A number of news reports the past two weeks shows China is racing to tick the boxes for “full convertibility” although the definition of “full” remains arguable, said Li Yimin, a macro-economy analyst with Shenwan Hongyuan Securities based in Beijing.

Last March, Zhou stated that China would strive to achieve basic capital account convertibility by the year end. He reiterated this target in April at the IMF-World Bank meeting in Washington, DC.

The task has also been pegged high up on the ruling party’s agenda as China strives for inclusion of the yuan into the basket of Special Drawing Right. The IMF rejected China’s request in 2010, largely because the yuan is not “used freely”.

The latest move encouraged by the PBOC came this week as HSBC announced setting up a majority-owned joint venture brokerage, the first of this kind in the country in Qianhai, a pilot free trade zone based in southeast China’s Shenzhen.

It has managed to do so by exploiting an agreement under CEPA designed to encourage financial integration between Hong Kong and mainland China. Its competitors were forced to settle for minority stakes in their joint venture brokerages and are struggling to fit into the local culture and turn a profit.

“HSBC won’t do it only because the regulation allows it to. It should be doing it because it can, or will be able to do more in the near future,” Li said.

Stuart Gulliver, the chief executive of HSBC, said the venture would enable the bank to underwrite renminbi-denominated bonds for companies in China and back shares on the Shanghai and Shenzhen stock exchanges, he said.

China also opened its US$5.7 trillion interbank bond market to foreign central banks and sovereign bonds in July. Last Friday, the PBOC released a statement with other ministry-level authorities including the Ministry of Commerce, emphasising Shanghai would spearhead the move to make the yuan convertible under the capital account in its pilot free-trade zone.

“The Shanghai Stock Exchange is supported to set up a financial assets trading platform open to international investors, to orderly draw offshore long-term funds into trading the onshore stocks, bonds, and funds, and to explore opening the IPO markets to offshore institutional investors,” the statement said.

This came just several hours after Charles Li, the CEO of the Hong Kong Exchange & Clearing, called on the inclusion of IPOs in the Shanghai-Hong Kong Stock Connect, which started almost a year ago and doesn’t yet allow investors to access initial share sales.

“It is unlikely that China will literally tick all the boxes before this year-end, but the push is really strong, as the central bank eased control on its currency exchange rate since August 11,” said Li-gang Liu, chief economist for Greater China, ANZ Bank in Hong Kong.

Additional reporting by Jing Yang