(I write a monthly column for a Chinese paper. Here is a draft of it)
It is as if
Hamlet, the confused prince of Denmark, has taken up residence in Beijing. The famed-prince wrestled with “seeming” and “being”. So are Chinese officials. They seem to be relaxing their control over financial
markets but are they really? Are they tolerating market forces because
they approve what they are doing, such as driving interest rates down or
weakening the yuan? If so what happens
when the markets do something which they don’t approve?
Much of what
seems like the internationalization of the yuan, for example, is no such
thing. It really is more about the Sino-ification
of Hong Kong than the internationalization of the yuan. Goods that go from the
mainland to Hong Kong or from Hong Kong to the mainland are considered trade.
It is not true any more than buying Scottish salmon at Harrods in London is an
import. Adding
pretension on top of make-believe, when that “trade” between the two parts of
China is conducted in yuan, officials
count this as the internationalization of the yuan, and too often the media and
analysts parrot this.
another fiction. Imagine you have an
equity account with a financial advisor in New York, but cannot buy a security
on the Philadelphia Stock Exchange. And
if the prohibition was lifted, is that evidence
of opening up and liberalization of the capital markets?
Almost two
years ago, China began allowing people with accounts in Shanghai to invest in
companies on the Hong Kong stock market and allowed accounts in Hong Kong to
buy and sell securities traded in Shanghai.
There are daily limits and overall
limits. Since the
program was launched, more money went to
Hong Kong than the mainland. Reports
suggest that Hong Kong account holders, which can include non-residents have
used about half of the CNY300 bln quota or
GBP17.3bln. Over the same period, Chinese investors have
used 80% of their CNY250 bln quota or about GBP23.1 bln.
is that after some delays, a Hong Kong-Shenzhen link reportedly has been given the final ok, and should be launched toward
the end of the year. Apparently, there will be no overall quota, and
there have been some reports suggesting that the overall quota Shanghai will be abandoned.
will retain daily limits in Shanghai, and apply them to Shenzhen as well. The daily quotas
are CNY13 bln entering mainland and CNY10.5 bln leaving it.
Much of the
hype about the internationalization of the yuan seems to confuse it with a bull
market. Chinese officials allowed the
yuan to appreciate steadily for several
years. Why should Chinese companies with
dollar receivables not sell the dollars as quick as they can (to the central
bank of course) and keep yuan, which also offers higher interest rates?
which itself is an outgrowth of another fiction. The yuan claims offshore cannot be exercised onshore.
This has led to an offshore yuan
market (nicknamed CNH to distinguish it from CNY) mostly for bonds.
China allowed the yuan to depreciate by about 2.6% against the US dollar, which
had been trending higher against most major and emerging market
currencies. It sent shockwaves through
the capital markets.
seven and a half months of this year, the yuan fell another 3% against the dollar.
The markets yawned. While the Shanghai is nursing a 12.5% loss,
the investors have ignored it. The US S&P 500 is at record highs. The MSCI Emerging Market equity index is at
new highs for the year, as are several European markets, including the German
Dax and UK FTSE 250.
the yuan will formally be included in the
IMF’s SDR (Special Drawing Right—a type of credit officials can use to settle accounts). Is this more theater? Some countries will include yuan in reserves, and there have been reports of
official (and private investors) buying mainland bonds. For official accounts and large institutions,
some of the previous regulations (QFII—qualified foreign institutional
investors) have been relaxed. The inflows come to China at an opportune time,
as the capital account appears to be stabilizing
However, by
most measures, the yuan and Chinese capital
markets, and especially the government bond market, which is the most obvious instruments for reserves, are too small
to attract much of the reserve managers. Consider the
largest reserve holders. China is by far
the largest, but of course, must be excluded. Japan is next. Its reserves are thought to be heavily weighted toward the US dollar. It is unlikely to diversify much into yuan
bonds. China and Japan together account
for more than a quarter of global hard currency reserves.
Saudi Arabia
is third. It is also believed to prefer US dollars, for which its revenue is
mostly tied and its currency pegged.
Taiwan is the fourth largest followed by South Korea. Some though limited diversification into yuan
bonds would not be surprising, nor change the underlying narrative. And
let’s not even talk about if the Hong Kong Monetary Authority were to hold yuan
bonds as reserves.
officials are fond of saying that they are giving market forces more sway and
that it will remain broadly stable against a basket of currencies. This seemingly contradictory impulse captures
the tension between seeming and being
that makes many investors wary of China, leaving aside the macro-considerations of rising debt levels, slowing
growth, and numerous industries plagued by overcapacity.