Mon, May 14, 2012 - Page 8 News List

Steady course for offshore yuan

By Jason Yeh 葉家興

Public opinion was made abundantly clear in French and Greek elections last weekend. The Greek coalition government mustered less than one-third of the vote and former French president Nicolas Sarkozy became the 11th European leader to lose his job since the financial crisis first hit in 2008. As a result of these developments, stock markets and foreign exchange markets across Asia fell.

Similar situations have arisen repeatedly over the past few years and the political and economic situation in Western countries has impacted the stability of Asian economies. Despite living in a time of globalization, increasing fluctuations in financial markets seem to be an unavoidable evil.

China, which has risen to become the world’s second-largest economy since its accession to the WTO, no longer merely accepts the financial policies of the Western world, which it considers to be aimed at making a profit at the expense of others.

One reflection of China’s frustration has been the liberalization and internationalization of the yuan in the wake of the financial crisis. As China gradually makes its way onto the world stage, it is all but certain that its currency will at some point reach a standard commensurate with its international status.

By diversifying offshore markets for the yuan, Beijing is currently promoting a policy of gradual deregulation aimed at expanding the internationalization and liberalization of its currency. However, when developing offshore yuan business, the government must pay close attention to the interrelationship, reliance and trust between the offshore economy and China.

In addition to Hong Kong, which is the premium choice for an offshore market, London, Singapore and even Paris are striving to become secondary offshore markets for China.

What about Taiwan? The national economy is focused on the information technology industry, which is complementary to China’s economic structure. Taiwanese businesspeople have invested in the Chinese market for many years and have a greater need for industrial capital than financial speculation.

In addition, as mutual cross-strait trust expands, Taiwanese companies and people are less motivated to engage in financial speculation, which would reduce the risk of “hot money” for China.

In other words, if Taiwan can leverage timing, culture and geographical proximity to its advantage, it could easily become another offshore market alternative for China.

The birth of an offshore market is closely related to financial control. From this perspective, China’s current situation is similar to that of the US after World War II: It is on the verge of becoming a great power, it has experienced a global financial crisis and it has layers of financial regulation to ensure stable domestic financial and economic development.

Although London in the 1960s did not quite measure up to Geneva or Frankfurt, an openness to innovation and far-reaching banking networks meant that it eventually surpassed its competitors to become the leading financial center in the region and the major offshore market for US dollars and bonds.

At present, Taiwan’s pool of yuan lags far behind that of Hong Kong. If, however, the nation were to sign an agreement with China on a cross-strait currency clearance and settlement mechanism based on the Economic Cooperation Framework Agreement (ECFA) and financial cooperation, and if it could accelerate system reform, Taiwan could yet play a key role in the internationalization of the yuan.

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