China is de-pegging all right, but it's doing so with caution, confidence and a bit of help from Hong Kong. Last week, the People's Bank of China stunned the financial world by announcing its readiness to break the yuan's 23-month-old dollar peg and making the currency more flexible. But in no way is Beijing ready to expose its yuan to the brutality of the global markets.

The grand gesture was aimed more at deflecting foreign criticism before the G20 summit in Canada. And, as Chinese editorials rushed to point out, this should not be seen as a precursor to a one-way appreciation of the yuan.

China watchers said that if the Western world expected the yuan to rise continually and strongly, they could be in for a disappointment. The US dollar which used to fluctuate between 6.82 to 6.84 yuan, actually went down to 6.78 soon after the de-pegging policy was announced.

An unfettered yuan, on the other hand, was good news for the Chinese markets. The Shanghai Composite had its best week for the month last Friday with the index up 1.6 per cent.

Hands-on approach

For long, most of the currency controversy has remained focused on US-China balance of trade and China's own export-oriented economy. But for considerable time now, Beijing has been working meticulously to internationalise its currency.

At the two-day ‘Lujiazui Forum 2010,' held in Shanghai this weekend, the thrust was on integrating the Hong Kong, Taiwan and mainland China markets. With the three securities markets at different stages of growth and attractiveness, Beijing is now pushing for greater integrity and homogeneity. This, it aims to do by putting more yuan business in Hong Kong's way.

A significant step toward this was taken with the launch of the yuan trade settlement pilot scheme in July 2009. Last week, the scheme got a huge fillip when the Bank of China (Hong Kong) grabbed 34 yuan trade settlement transactions.

According to KC Chan, Hong Kong's Secretary for Financial Services, who spoke at the Lujiazi Forum, these transactions would ultimately help internationalize the yuan and make Hong Kong an important centre in the yuan business.

Twin powers

China intends to take every advantage of Hong Kong's sound reputation as a safe international financial centre to beef up its currency internationalisation drive and is doing everything it can to dovetail the interests of the two markets.

According to Chan, Hong Kong's success has been its ability to satisfy the demand of Chinese mega companies for high volume of international capital. For the future too, this Special Administrative Region of China intends to position itself as the ‘fund-raiser' for mainland companies.

With the financial centre of gravity shifting to the East, China therefore is concentrating heavily on internationalisation of the yuan. By integrating Hong Kong and Shanghai through greater use of the yuan, Chan believes China's financial markets will become more and more open, giving it better connectivity with trading partners, investors and overseas financial institutions.

Opportunities

At the Lujiazui Forum, government representatives made several significant announcements related to the markets. According to the China Securities Regulatory Commission (CSRC) the government is considering a plan to encourage foreign companies to issue yuan-denominated stocks in Shanghai. Regulators are also studying the feasibility of allowing domestic listings of Hong Kong exchange-traded funds.

The CSRC also wants to step up the development of the corporate bond market as it wants to encourage companies to reduce their reliance on bank lending. Chinese bond sales surged to 1.96 trillion yuan (Dh1.05 trillion) last year from 981 billion yuan.

The bad news is that the Shanghai international trading board may not be happening any time soon. According to sources, legal and technical issues will delay the proposed trading of international equities on the Shanghai Stock Exchange.

China had floated the idea of allowing foreign companies to sell shares publicly in Shanghai as early as 2010, as part of efforts to open its capital markets and broaden investment channels for domestic investors.

HSBC and Nasdaq are among the international companies that have expressed an interest in such listings.

 

The writer is a freelance journalist based in China.