Last updated: July 29, 2015 4:07 pm
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The IMF's managing director Christine Lagarde
If, 20 or 30 years from now, central banks and sovereign wealth funds hold a significant portion of their reserves in renminbi-denominated assets, financial historians will probably look back on 2015 as a turning point.
The International Monetary Fund is engaged in a year-long review of the currency composition of its special drawing rights (SDR), with a final decision expected between November and early 2016. The currencies now included in the SDR “basket” are from the world’s most influential economies: dollars, euros, yen and sterling.
If the fund decides to add the renminbi to the SDR basket, it will amount to an assurance to global central banks by the world’s foremost financial technocrats that renminbi assets are safe.
For China, inclusion in the SDR would also symbolise the arrival of its currency on the world stage alongside those of the world’s richest countries. National leaders would see it as a sign of respect for China’s increased influence in the world economy and the reforms it has taken to integrate itself with the global financial system.
“SDR inclusion could be interpreted as international recognition of China’s increased economic importance and role in global financial markets,” says Zhu Haibin, chief China economist at JPMorgan Chase.
The direct impact of SDR inclusion is almost negligible. The IMF created SDRs in 1969 to respond to a global shortage in viable reserve assets under the Bretton Woods system of fixed exchange rates. But Bretton Woods collapsed less than a decade later and today various currencies not included in SDRs, such as the Swiss franc and Australian dollar, are also widely held as reserves.
“While it appears to be a contentious issue, the Rmb’s inclusion in the SDR has little tangible and immediate economic benefit for China. The SDR is rarely used by the global financial markets and no country would manage foreign exchange reserves modelled by the SDR,” says Li-Gang Liu, chief greater China economist at Australia and New Zealand Banking Group.
But inclusion into this elite club would have real-world consequences. Every IMF member holds at least some SDRs. Thus, the inclusion of the renminbi would mean that these countries would suddenly be holding renminbi, albeit indirectly. With that threshold crossed, central bank renminbi holdings could be poised to increase rapidly.
Though there is no formal application process to join the SDR basket, China has clearly stated its desire to be included as a result of the five-yearly review now under way.
Wei Yao, China economist at Société Générale who assesses the renminbi’s chances of inclusion at about 50 per cent, says: “China, as the biggest exporter in the world, passes the first test with flying colours. It is more debatable whether the renminbi meets the second criterion.”
The main sticking point is Chinese capital controls, which severely restrict buying and selling of renminbi for investment purposes. Progress on so-called capital-account convertibility will be an important factor in the IMF’s decision.
The launch of the Shanghai-Hong Kong Stock Connect last November marked an important step towards allowing freer cross-border flows of renminbi — known as capital-account liberalisation. But the programme is still subject to a quota that caps foreign investment to a tiny fraction of overall market capitalisation.
Access to the bond market is an even greater obstacle, as bonds are the favoured assets for central bank reserve managers. China took an important step towards free usability in July, however, when it announced that central banks and sovereign wealth funds no longer needed preapproval to buy into the domestic bond market. But non-official investors such as mutual funds and individuals remain subject to quota and licensing restrictions.
“The announcement shows that the PBoC’s determination for capital-account liberalisation has not been deterred by the stock market volatility . . . and that the central bank is still promoting the renminbi’s inclusion in the IMF’s SDR basket during its next review,” said Jianguang Shen, China economist at Mizuho Securities Asia.
The IMF has never adopted specific metrics to determine whether a currency is “freely usable”, giving the fund’s executive board considerable flexibility. However, unofficial IMF working papers suggest that the fund considers whether the renminbi is, in fact, widely used for financial transactions at least as important as what regulations appear to permit or forbid.
“Capital-account convertibility is not a precondition for SDR inclusion. For instance, the yen was included in the SDR basket in 1973, but Japan liberalised international capital flows only in 1980,” says Mr Zhu.
In this regard, the fact that 60 central banks already hold renminbi among their reserves, according to Standard Chartered estimates, is likely to be viewed as an important indicator of usability. But it remains unclear how the IMF will interpret the fact that many of these central bank reserves are held in offshore renminbi assets, which are not subject to Chinese regulations.
Many other obstacles remain to the currency being “freely usable”. Individuals are still subject to a $50,000 per year limit on converting renminbi to foreign currency and vice versa. China plans to roll out a pilot programme for individual outbound investment this year, but it will still be subject to quotas.
Ultimately, analysts expect political considerations to play an important role. If the fund refuses entry to China, it could deepen the Chinese leadership’s distrust of institutions such as the IMF, World Bank and G20, which it already views as unfairly dominated by the west.
On the other hand, the US is likely to argue that the SDR is an important lever that can be used to incentivise China to quicken financial reform. IMF president Christine Lagarde has said that the renminbi’s inclusion is a “matter of when, not if”. That has led many observers to expect a compromise in which the fund will formally declare its intention to add the renminbi to the SDR — but only once deregulation proceeds a bit further.
Last updated: July 29, 2015 4:07 pm
The company is not a household name outside China and probably not much beyond its home base of Hangzhou, a city in eastern China.
But it recently signed up United Overseas Bank in Singapore to handle its cross-border renminbi cash management, to support expansion beyond China.
Lin Jianhua, Sanchuan chief executive, says the Singapore bank approached his company when it learnt that the hydropower group was looking to extend its operations.
“Recognising that we needed to enhance our cross-border liquidity flow, UOB shared with us their strong understanding and insight on China’s financial liberalisation and RMB internationalisation trends, as well as on offshore RMB regulations,” Mr Lin says.
UOB, Singapore’s third-largest bank by assets, has particularly strong connections with ethnic Chinese business in the region, as it traces its roots back 80 years to the Straits Chinese, or Peranakan, who settled in Southeast Asia in the late 19th century.
It is now acting as intermediary for a next wave of outbound Chinese businesses such as Sanchuan and doing so by offering renminbi banking services as Singapore’s role as an offshore renminbi centre grows.
Sam Cheong, head of the foreign direct investment advisory unit at UOB, says almost half the companies that the bank helps expand into Southeast Asia are from China. “Increasingly, we are seeing more of them use renminbi as a settlement currency.”
In June, UOB established a “renminbi solutions team” to help companies better manage their cross-border business in the Chinese currency.
While Hong Kong remains the dominant offshore renminbi centre, China has appointed renminbi clearing banks in Singapore, London, Luxembourg and Taipei and other locations, at the same time agreeing currency swap lines with other central banks and handing out renminbi quotas.
When it comes to handling global payments in the Chinese currency, the addition of other countries on top of market leader Hong Kong as renminbi centres boosted the share of collective activity by such hubs to 25 per cent of total activity in February. According to Swift, the clearing system, this was up from 17 per cent in February 2013.
While that may create an impression that each centre is competing for a slice of offshore renminbi action, the example of Sanchuan shows that each hub is fulfilling different roles and that they are not necessarily competing directly with each other, even as the total pie is growing.
Singapore, for example, is building itself up as a regional treasury centre for multinational companies, as well as companies emerging from within the Association of Southeast Asian Nations (Asean) and expanding beyond their home markets.
It is also vying with Hong Kong for pole position as Asia’s largest wealth management centre.
“Singapore provides a lot of hedging and liquidity solutions for corporates and is developing wealth management products catering for the potential opening up of overseas outbound investment for Chinese investors,” says Candy Ho, global head of renminbi business development, markets, at HSBC in Hong Kong. “Each of these centres serves different purposes.”
The renminbi has outstripped the Japanese yen, the US dollar and the Hong Kong dollar as the main currency for payments between China and the rest of the Asia-Pacific region over the past four years, according to data from Swift published in May.
The Chinese currency was used in January-April for 31 per cent of payments between China (including Hong Kong) and the rest of the Asia-Pacific region, up from 7 per cent back in April 2012, Swift says.
Singapore is increasingly seen as providing a conduit for use of the renminbi in Southeast Asia, building on the Asian city state’s position as a regional entrepot since the 19th century.
Meanwhile London, the world’s largest foreign exchange trading hub, has carved out a role as a big renminbi FX trading centre. In its latest half-yearly survey of the British capital as a renminbi centre, the City of London Corporation found “particularly strong growth” in FX-related businesses in 2014.
Overall trading volumes more than doubled last year, up 143 per cent, from 2013, with average daily volumes reaching $61.5bn, nearly six times as large as those reported in the Corporation’s first survey in 2011.
According to the British Consulate in Hong Kong, London accounted for 42 per cent of all FX trading in renminbi by the third quarter of 2014, compared with 31 per cent at the end of 2013. This equals the share of such trades taking place in Hong Kong.
In Taiwan, interest in the renminbi is largely domestic, focusing on the needs of insurance companies for longer-dated borrowing using so-called Formosa bonds, denominated in renminbi.
But the underlying trend is clear. Internationalisation of the renminbi is being driven by the growing number of offshore centres other than Hong Kong.
Just as in the case of Sanchuan, that process is bringing to light some unexpected players. Recent data from Swift show that the renminbi is starting to be used in South Africa, a country hitherto scarcely known for this.
The amount of payments in the Chinese currency has jumped by a third in the past 12 months and by 191 per cent over the past two years. According to Hugo Smit, head of Africa south at Swift: “The rise of renminbi usage in South Africa is another good indicator of the cross border use of the currency.”
Last updated: July 29, 2015 4:07 pm
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Russia's President Vladimir Putin greets Xi Jinping, president of China. Russian companies have a keen interest in the Rmb
When discussing the internationalisation of China’s renminbi, Denis Shulakov, first vice-president of Gazprombank in Moscow, is fond of quoting Wayne Gretzky, the former Canadian ice hockey player and coach.
“You don’t need to be where the puck is, you need to be where the puck is going to be,” he says.
Gazprombank, like many Russian banks, is furiously working to set up operations in both Hong Kong and on the Chinese mainland in preparation for conducting more trade and finance in China’s renminbi: “All the Russian corporates who are key clients of the bank are moving in this direction,” explains Mr Shulakov, who says his organisation expects to be the first Russian bank to obtain a broker dealer licence in Hong Kong.
There is a good reason why Russian companies would be showing a keen interest in China’s currency for both trade settlement and finance: sanctions against Russia have frozen access to funds in the west. But for other banks and companies around the world, the reasons are just as compelling.
The past five years have seen a surge into the renminbi as a way to settle trade with the world’s largest exporter, a trend enthusiastically supported by Beijing as a means to push its long-declared goal of having a global reserve currency, commensurate with the dollar, the yen and the euro.
Already 22 per cent of China’s trade is being settled in renminbi, up from 8 per cent in 2012 and zero five years ago, according to estimates by Citi.
Bruce Alter, head of trade and receivables finance for HSBC in China, reels off a list of companies that he has worked with to do deals in renminbi: an Australian seafood exporter, a Malaysian palm oil producer, a Chinese bus manufacturer selling to Brazil and a Canadian furniture retailer.
“If you look at Rmb trade flows 2-3 years ago, it was really dominated by Hong Kong China trade, but you see today, although there is still a lot of Hong Kong in the mix, there are more companies from more markets getting into the Rmb game,” he says.
He says the main benefit of using the renminbi is that for large importers (often retailers) it is cheaper – it removes the foreign exchange margin from the contract and often Chinese companies will offer a discount of 1-2 per cent if buyers pay in renminbi.
As for overseas sellers, agreeing to trade in renminbi gives them a better chance of penetrating the Chinese market. One additional motivation is that if overseas sellers already have operations in China, they can use the renminbi export proceeds to cover their Chinese operational costs.
In addition to hubs such as Hong Kong, Singapore and London, many more countries are now also involved in offshore renminbi, with China actively promoting greater adoption of its currency in trade and finance. Central banks in countries as far apart as Malaysia, Nigeria and Chile hold part of their foreign exchange reserves in renminbi. The People’s Bank of China (PBoC) has set up dozens of arrangements with its counterparts around the world, allowing it to swap renminbi for those parties’ currencies.
“On the trade and commerce aspect, the currency is fully liberal,” says Sandip Patil, Citi’s Asia managing director for global liquidity and investments. “Any company can use Rmb whichever way they like to conduct international trade and associated working capital financing.”
He adds: “Many times you are able to negotiate larger discounts with your suppliers if you are paying in Rmb” because paying in foreign currency creates procedural bottlenecks and delays.
But compared with its surging use in trade, the renminbi still has little take-up in capital markets, despite concerted efforts by the Chinese government. This is mainly because of continuing restrictions on the ability to convert and transfer the currency.
Once it obtains a broker licence in Hong Kong, Gazprombank is keen to access what it estimates to be a $6tn pool of finance in the onshore China market through “panda bonds”, Chinese renminbi-denominated bonds issued in China by a non-Chinese issuer. “The only problem with the yuan is conversion and transfer,” says Mr Shulakov. “If you have onshore yuan you cannot freely convert it and transfer it.”
Zhou Xiaochuan, China’s central bank governor, has said it is committed to liberalising China’s capital account, but stops short of wanting the renminbi to be fully and freely convertible in capital markets transactions. In a speech in April, Mr Xiaochuan used the term “managed convertibility”.
Meanwhile, discussion with the International Monetary Fund over including the renminbi in the basket of currencies used to denominate the IMF’s special drawing rights (SDR) would open the way for reserve currency status, if the Fund gave a green light during its five year review in November. But many are sceptical that this will happen.
Dennis Tan, foreign exchange strategist for Barclays, said China has met only a few of the prerequisites for being an SDR currency and that the low usage of Rmb in international financial transactions is a potential hindrance. “In volume of trade flows and exports, obviously China has made it into the club,” he says, But in other measures, such as currency denomination of international banking liabilities and or global reserves, the Rmb still falls short, he says.
Mr Shulakov, though, is optimistic. “We are yet to experience the opening up of the Chinese local market,” he says, “but it is going to happen, inevitably. So we are in discussions and we are preparing ourselves for this, just as the Morgan Stanleys and Goldman Sachs of this world are doing.”
Last updated: July 29, 2015 4:07 pm
Li Keqiang did not shirk the issue of currency wars when he spoke to the Financial Times in April.
“We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war,” said China’s premier.
Currency intervention is an issue that has chilled US-China relations for more than a decade and, while it has gone quiet of late, it is threatening to resurface.
China’s equity market shock, which from mid-June saw a wipeout of more than 30 per cent of the value of shares in Chinese companies, prompted a dramatic reaction from Beijing with regulators imposing a six-month ban on share sales by big shareholders.
As China’s economy slows, could another strident reaction be forthcoming, by depressing the value of the renminbi in order to stimulate trade, in other words a breakout of the very currency war China has pledged not to undertake?
This depends on assessing the fair value of the renminbi. The currency was pegged to the dollar until 2005, since then Beijing has allowed it to rise, except for a two-year period around the global financial crisis.
From the end of the peg to the end of 2013, it rose in value against the dollar by a third.
After the dollar hit a low of Rmb6.05, the currency pair has for the past 18 months traded in a band of Rmb6.05 to 6.27.
That, according to Aroop Chatterjee, foreign exchange strategist in Barclays, is where Beijing wants the renminbi to stay for a number of reasons.
Chief among them is Beijing’s campaign to be included in special drawing rights (SDR) the basket of currencies afforded official reserve currency status by the International Monetary Fund. A decision is expected later this year.
“Part [of the reason for the tight range] is related to the People’s Bank of China’s intention to keep the renminbi stable and a lot of that is related to the potential for destabilising capital outflows,” says Mr Chatterjee.
“But there is also the political intent on SDR. They want to project a picture of stability to the IMF and the rest of the world.”
For these reasons, several currency strategists expect the renminbi to hang around the level of Rmb6.26 by the end of the year. But Daniel Tenengauzer, emerging markets forex strategist at RBC Capital Markets, demurs. He thinks Beijing will allow the band to widen.
“Part of the internationalisation of the renminbi is a widening of the band and a more volatile exchange rate,” he says.
This opens up the debate on the renminbi’s valuation. The International Monetary Fund, in a notable statement in May, declared that it no longer believed the renminbi was undervalued.
Where the value of the renminbi goes depends on China policy. Mr Gu reckons it will rise if China accepts lower growth and opens its capital account to global investors.
But if it chooses to expand fiscal stimulus to support growth and continues to distort investment, he believes the current account surplus will shrink quickly and the renminbi will weaken.
Ying Gu, Hong Kong-based emerging markets strategist for JPMorgan, agrees, particularly as China’s current account surplus to GDP, an indicator for the currency’s valuation, has fallen to 2.3 per cent.
As the dollar strengthens through US Federal Reserve interest rate liberalisation, “I am afraid renminbi will become too expensive”, he says.
It already is, says Mr Tenengauzer. “A year ago, the currency was at fair value and now it’s 15 per cent overvalued,” he says.
Mr Chatterjee agrees. “The dollar has appreciated against the rest of the world but the dollar-renminbi pair has gone sideways. The renminbi is quite expensive,” he says.
China’s economy is showing weakness, the country faces deflationary pressures and the shock sell-off in its equity markets points to the government needing to find ways to stabilise growth and minimise risks. Cuts in interest rates are likely.
Whether that amounts to a currency war is a question of interpretation.
“In the near term, the focus is on SDR,” says Mr Chatterjee. “But further down the road, the risk to growth is to the downside. With broader dollar strength, weak growth will lead policymakers to accommodate a weaker exchange rate.
“If it was the case that the renminbi was moving because of intervention efforts, that would be different. But there are clear signs in capital outflows, in the weak economy and in weak inflation that the macroeconomic backdrop supports a weaker currency.”
The broad narrative of a coming capital account liberalisation in China has always bugged us. The main reason being that we couldn’t see how China, in its current state, was going to start letting money flow (easily) out as well as in.
But before we get into that we should note, somewhat counterintuitively, that China’s capital account is already fairly liberalised.
As Gavekal’s Chen Long says:
It is not at all easy to specify just how open a country’s capital account might be. The well-known Chinn-Ito Index shows that China’s capital account is among the most closed in the world, and has not opened at all in recent years. Yet this is difficult to square with the fact that total crossborder capital flows have increased by ten times over the past decade to US$1.5trn. China has a low level of de jure openness but a higher level of de facto openness.Very few types of capital flows are completely free of government control, but the partial controls still allow for a good deal of flexibility. Foreign direct investment has been largely open for decades, though there is still an approval process as well as restrictions on many sectors. Trade credit and offshore borrowing are subject to controls for prudential reasons, but they are relatively accessible for many companies. More recently, China has also simplified foreign exchange regulations to give companies more freedom in dealing with their foreign currency assets. According to the IMF’s classification, 35 out of 40 capital account items are already fully or partly convertible in China, leaving only five inconvertible.
The biggest remaining restrictions on capital flows today are on foreign currency exchange for individuals, and inward and outward portfolio investment. But there has already been fairly substantial change on this front. Today every Chinese individual is allowed to buy no more than US$50,000 worth of foreign currency from banks each year. But that limit was lifted from US$20,000 in 2007, and it is also not that hard for the more savvy to get around it.
Indeed. And if you are a less than savvy individual you might want to look into hard-to-value assets (such as art work), insurers, equity deals, Macau, brokerages, underground banks, cruise lines, and… er, . To savvy up, that is, even if we’d suggest our list is almost certainly lagging Chinese innovation where this is concerned.
Where the portfolio investment channels are concerned — mostly quota-based via the Qualified Domestic Institutional Investor and (RMB) Qualified Foreign Institutional Investor routes — suffice to say for now, as Long does, that it’s “a more nuanced tool than an on-off switch, as the quota can be increased over time as regulators get more comfortable with capital flows. Indeed, since 2012 China has significantly increased the size of the quotas for each of the channels”, including the recent Shanghai-Hong Kong Stock Connect which doesn’t apply a quota to individuals as do the QDII/ QFII and RQDII.
So we’re in a situation where China’s capital account is more open than it has been before and recent relaxations of control have increased the size and volatility of flows. Including, obviously but crucially, outflows. That makes China’s leaders v nervous
In fact, suggests Long, that’s one of the main, again counterintuitive, arguments for liberalisiation:
In fact one of the stronger arguments for further liberalization of capital flows is that the current situation is an unhappy halfway house: capital flows have become much larger, but are not very transparent. With some channels quite open but others still closed, there is much illicit use of the more open channels to disguise capital flows. For instance, companies can falsify export and import invoices, or trade finance documents, in order to move money in and out of the country. Reformers argue that it would be better for these capital flows to happen out in the open rather than underground. So the debate is not about whether or not to open the capital account, because it is in fact already partially open. The question is where to go from here.
We really like this way of looking at the issue. It’s not naive, for one.
The naive approach sees China marching towards actual capital account liberalisation. But, seriously, who thinks that is on the cards in the near term? (Or even, depending on your level of pessimism about China’s economic future, in the longer term?)
To re-re-re-iterate, this is a system very badly. It is happy to welcome it in, vastly less happy to see it (now internal capital?) leave. More so, it doesn’t take much to draw a lesson about attitudes to control and stability from China’s reaction to the recent stock market puke.
Long argues that the issue of CA convertibility is high on the politically important list, for both Xi and PBoC governor Zhou. And that it’s one way for the leadership to demonstrate reform. Damp squibs need to be covered up after all.
Then there’s the SDR angle. The idea of SDR inclusion has been held up in China and for the RMB to included in the IMF’s currency basket it has to be “freely usable”.
The reality is the decision will be more about politics and the US’s opinion on the matter — as the IMF noted previously, “there is no Board-approved set of indicators for such an assessment, nor a formal limit on the number of currencies that can be considered freely usable” and that decisions about the basket “would require judgement framed by the definition of a freely usable currency” — but here’s a chart from Cap Econ attempting to summarise China’s current position from a purely economic standpoint:
And an extra large chart covering RMB promotion from Xi et al from Deutsche for those who can be bothered clicking:
The more important political stuff is trickier to read but do remember that Jack Lew said, per Cap Econ again, on 31st March that further reforms were needed for the renminbi to qualify to be part of the SDR basket. So this could well be pushed out either way. Fwiw, Deutsche see a 40 per cent probability that the RMB will become an SDR currency in 2015, and a 70 per cent probability that this will happen by the end of 2016. We shall see.
Anyway, on we go, as this isn’t all about SDR inclusion and China needs inflows to help with its fiscal problems. Deutsche estimated in April that the size of the central government’s financing gap may be 3.7 per cent, and, to give one example, it could do with generating external demand as it launches its local government in ever greater style. For those keeping count, another.
So, via Long, to the notion that while Zhou pledged to achieve “capital account liberalization,” he did not promise full capital account convertibility. Expect a future of monitored flows and capital controls where necessary even as China says it has opened the CA. Which should surprise nobody, tbh. Per Deutsche, “capital account openness is not a bipolar choice. Instead, it is a spectrum.”
So, as Long says, “managed convertibility” is the more appropriate likely term — and it’s not as if the world’s orthodox economic institutions, like the IMF, disagree with a cautious approach:
So what will China’s capital account look like under the future of “managed convertibility”? We think there will be three themes in the coming reforms.
First, access to domestic capital markets will be greatly increased, as separate small quotas for each investor are replaced with large quotas for all foreign investors in aggregate. The Shanghai-Hong Kong Stock Connect program marks the first step in this direction. Previously, foreign investors only had access to the Chinese financial market through an individual QFII quota. Although these quotas have been increased quite a bit, they are still not large and investors complain that the approval process is quite cumbersome. The Stock Connect program instead has a RMB250bn quota for everyone, requiring no prior approval—and the quota can be easily lifted when desired. A complementary Shenzhen-Hong Kong Stock Connect program will also be launched later this year, and we expect more such measures in the future. And in talks with the US in June, China said it would create a similar program for the interbank bond market, offering foreign investors an aggregate quota without individual limits.
Second, as China liberalizes it will try give to preference to longer-term investors who can be a stabilizing influence. A good example of this is its strategy for the bond market. We expect the domestic government bond market will grow rapidly in the coming years as fiscal deficits expand and more local government debt is restructured… This gives the government an incentive to open up of the bond market in order to find new marginal buyers of bonds. The potential is clearly very large: currently foreign investors hold just 2% of China’s onshore bond market. By comparison, India allows foreign investors to hold as much as 12% of its bond market. The People’s Bank of China said this week that central banks, sovereign wealth funds and international organizations can invest in the interbank bond market with no quota restriction, but shorter-term investors did not get the same treatment. The recent stock market crash may also lead regulators to restrict short selling and margin financing by foreign investors.
Third, restrictions on Chinese people moving their money outside the country will be relaxed, but such flows will still be closely monitored. We expect the government will lift or remove the US$50,000 annual cap on foreign-currency exchange by households. Instead the central bank will monitor the overall direction of flows and reserve the right to put on more controls when necessary. There are domestic media reports that the central bank will start pilot programs to test a removal of this limit in a few cities. In its June report on renminbi internationalization, the central bank pledged to provide an expanded channel for households to invest in overseas securities, dubbed “QDII2.” Though details are scarce, it will be easy to improve on the current QDII program which limits investors to a few Chinese funds and has not been very popular.
Taken together, these changes have major implications for financial markets: there is no question that capital flows into and out of China will substantially increase. But there is also no question that China will declare that it has achieved capital-account liberalization while retaining more restrictions on capital flows than other major economies, and that it will not meet the definition of full capital-account convertibility. This is not a criticism: we think a headlong rush to a completely open capital account would be pointlessly risky. And this “managed” approach will still get China what it wants: recognition that the renminbi is a major global currency and that Chinese financial markets are of global significance
This is all obviously educated guesswork from Long but, even if he is potentially being a bit optimistic, the broad strokes feel right.
China will want to bring money in for the reasons outlined above — and it will probably succeed in doing so as yield hungry investors are attracted to RMB debt with the SDR push being — but it will be far more reluctant to let it leave. , (really) hypothetically.
Of course it remains to be seen how China’s recent attempt to save/ destroy its equity market will hit demand more broadly, but why anyone would expect any other form of liberalisation from China is somewhat beyond us.
– FT Alphaville
– FT Alphaville
– FT Alphaville