China poised to cash in on currency 'Big Bang'

One of the biggest questions in Asia is always if, or when, the Chinese currency will become convertible. As it stands, a major impediment to the Chinese financial services industry really taking off is the fact that the renminbi or yuan is not a tradeable currency.

The internationalisation of the renminbi offers major opportunities for Ireland, both in terms of being a centre for European front-office operations of these asset managers, and as their main distribution centre and domicile within Europe.

Irish Funds Industry Association chief Pat Lardner said that, during his Asia tour, the message from the asset management industry was that renminbi liberalisation was only a matter of time.

“Irrespective of whether it is quick or slow, no one doubts it will happen, and we need to make sure we are well-placed when it does,” he said.

HSBC economists Qu Hongbin, Sun Junwei and Ma Xiaoping, writing in a new report China’s Big Bang, believe the Chinese currency will become convertible within five years, part of a London-style “Big Bang” in financial oversight.

“Big Bang” refers to major reforms introduced in Britain in 1986 that transformed the country’s financial services industry into a global powerhouse.

“While there’s little doubt that policymakers will gear up both monetary and fiscal easing, likely leading to a modest recovery in the coming quarters, focusing on short-term stimulus misses a far more important trend – a swathe of co-ordinated reforms which we believe will revolutionise the country’s financial system,” they write.

“Although certain restrictions on capital inflows will likely remain, full renminbi convertibility would take China’s financial integration with global markets to a new level and have a profound impact on both China and the world.”

The economists are confident that overhauling the financial system will be a major priority for the leadership under Xi Jinping and they reckon interest rates will be liberalised and the bond market will be doubled in size.

By widening and deepening the bond market, banks will have more incentive to focus on financing small and medium-sized enterprises (SMEs) and consumers.

A pilot briefing in Wenzhou, which we’ve mentioned before in this column, should also help explore new options for funding SMEs, which make up 65 per cent of GDP, 50 per cent of taxes and eight out of 10 jobs.

These changes would give the private sector a boost by making capital allocation more efficient, and also provide the middle class with greater choice about where to invest its money so it can earn a higher return and therefore spend more.

“This should help rebalance growth from investment to consumption and lift the potential growth rate in the coming years,” the analysts believe.

Beijing is determined to push forward with interest rate liberalisation too, as evidenced by the latest move by the People’s Bank of China to widen the floating band of both deposit and lending rates while cutting interest rates.

The report said the “Big Bang” measures in London in 1986 sparked an increase in financial activity that completely altered the structure of the market.

“Now it’s China’s turn.”