The announcement last month that China’s State Council has called for a plan to achieve full convertibility for the yuan marks the start of profound and beneficial changes that will resonate inside and outside China for years.
Chinese Premier Li Keqiang’s (李克強) commitment to full convertibility under the capital account will free up two-way investment flows, and together with related interest rate and exchange rate reform, this is the start of a new economic chapter.
This is the emergence of the yuan as a viable new investment option tied to the world’s most dynamic economy, and eventually an alternative reserve currency. The internationalization of the yuan will in the long term fundamentally change the global microeconomic equation of how traders and financial houses structure their foreign exchange exposure, and the macroeconomic equation of how central banks and governments formulate fiscal and monetary policy.
Yet in the near term, the most profound changes will be felt within China itself.
As Li implied, in order to achieve capital account convertibility, China’s interest and exchange rates will have to be substantially set by market forces to maintain balance in capital flows in and out of the country and instill confidence among international investors.
Exchange rate reform is relatively straightforward. Though the yuan now floats within a managed band against the US dollar, analysts believe it is at, or very close to, its market rate. Chinese exporters have learned to live with a cheaper dollar and are unlikely to be affected by a new regulatory regime.
Interest rate reform is more thorny. China’s low deposit rates have provided a cheap source of investment capital and wide interest margins have given China’s banks latitude in lending and made it much less costly for the government to sterilize inflows to curb inflationary pressure.
Yet the country will reap huge benefits from interest rate reform: Chinese savers will get a better return, a more competitive market will promote more efficient allocation of capital and encourage retail savers to return to the formal banking sector rather than using the less-regulated shadow banking system.
The worries expressed by some international analysts that Chinese banks will be unable to cope with narrower interest rate margins — the source of the bulk of their income — are exaggerated. Though banks still play a much greater role in the Chinese economy than they do in the developed world, years of internal reform and regulatory improvements have produced competitive players. Banking profits grew 20 percent last year, even after interest margins were cut in June, and return on capital is still well above Western levels.
The current policy of combining steady domestic reforms with encouragement for the offshore market will gradually encourage convergence while avoiding systemic shock. Establishing and expanding the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Investor schemes are templates for future reforms, well-measured in conception and in execution.
The offshore yuan clearing centers in Hong Kong, Taipei and Singapore, along with international banks like HSBC, will have a key role integrating the yuan into global financial markets.
The offshore market today is relatively small, but growing fast. Now about 12 percent of China’s trade is settled in yuan, but this is expected to grow to more than 30 percent by 2015. As more international clients settle in yuan, the offshore liquidity pool will grow, as the euro market did in the 1960s and 1970s.
The yuan is starting to make its impact felt, within China and globally, but it is with the opening of its capital account that its full transformative effect will become apparent.
Peter Wong is chief executive officer of HSBC Asia-Pacific.
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.