CHINA’S ‘LOCALLY GLOBAL’ FINANCIAL REFORMS

Published on January 8, 2010 by brooks | This story has been viewed 187 times

There is a theme park in the southern Chinese city of Shenzhen in which many of the world’s most famous landmarks are recreated on a smaller scale. Visitors can stroll from the Eiffel Tower to the Pyramids, the Coliseum to the Taj Mahal, Stonehenge to Mount Fuji, Angkor Wat to the Kremlin and scores of other attractions all without leaving an area of 48 hectares. It may not be the real thing, but if offers a vision of the world in a controlled environment.

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In that aspect, the park prefigures elements of China’s evolving financial reforms. As it progresses, a plan unveiled earlier this year to turn Shanghai into a global financial centre by 2020 appears more concerned with bringing a controlled version of the world to Shanghai than with allowing Chinese money to engage with the real thing beyond its borders.

This may change, of course, but for now China appears to be seized more with reform than liberalisation. Indeed, its vigorous programmes to internationalise the renminbi, boost the size of its domestic futures markets and expand the Shanghai Stock Exchange are animated more by a desire to project power than to integrate China with the global financial system. Control is still the watchword.

Consider the first steps to turn Shanghai into a “global” financial centre. It looks increasingly likely that an “international board” may be launched on the SSE next year, providing a platform for some of the world’s most famous companies to list. So far, such icons of the capitalist world as the UK’s HSBC, America’s GE, Brazil’s Vale, and NYSE Euronext, the parent company of the New York Stock Exchange, hope to issue shares to the Chinese public in renminbi. Several more are expected to follow. In a few years’ time, Chinese investors may be able to pick and choose among many of the world’s top companies without ever leaving the comfort of the renminbi.

Reinforcing this sense of C2C (copying to China) is another plan to launch global exchange traded funds, products that will allow investors to buy a collection of overseas stocks and bonds denominated in renminbi. Even the recent launch of the ChiNext, an enterprise board for smaller Chinese companies, could be seen as part of the “locally global” trend. Before ChiNext, many smaller Chinese companies opted to list on Nasdaq, Hong Kong’s Gem or London’s Aim. Now the outward flow could slow.

In commodity futures trade too, signs of a controlling urge are clear. Policymakers make no secret of their desire to see China’s pricing power for global energy, metal and farm commodities enhanced, partly by boosting the breadth and depth of three burgeoning commodity exchanges. Each of these is leaping up the world rankings in terms of traded volume, with the Dalian Commodity Exchange, the Zhengzhou Commodity Exchange and the Shanghai Futures Exchange all set to be placed among the top 10 or thereabouts this year, following volume increases in the first nine months of the year of 60 per cent, 67 per cent and 253 per cent respectively.

In a nutshell, the hope of China’s policymakers is that once the volumes of contracts traded on its domestic exchanges climb near to – or even exceed – those recorded on the Chicago Board of Trade, the London Metal Exchange and New York Mercantile Exchange, then the world will start to take its pricing cues from Chinese exchanges. This, as Beijing sees it, will not only reflect the natural order of things (China is the biggest buyer of almost all physical commodities), it will also reduce price volatility – allowing Chinese companies to buy what they need more cheaply.

It remains to be seen whether the grass will bend as this wind blows. Some experts overseas argue that unless China allows foreign capital free access to its domestic commodity markets, the prices reached on those markets will never be seen as global benchmarks. But such confidence may be misplaced. Already, the copper futures contract on the Shanghai Futures Exchange is used as a reference for global prices, allowing domestic traders to hedge their exposure without having to venture into unfamiliar overseas territories.

On the face of it, the drive to “internationalise” the renminbi does not seem to derive from controlling urges. Allowing foreigners to use renminbi to settle their trade with Chinese companies looks expansive and generous, the type of gesture that might be expected of a rising power confident of its new weight in world affairs. And so it may ultimately become. But in its antecedents, this policy was defensive – a reaction to the exquisite indignity of being part of the US dollar zone with domestic monetary policy effectively outsourced to the US Federal Reserve when the financial crisis struck. China knows that if it really wants to wriggle off the US dollar hook, it needs to start earning more renminbi (not US dollars) for the things it sells around the world. That may mean that its pile of foreign exchange reserves stacks up less quickly and a smaller proportion of its trade receipts will therefore need to be recycled into investments overseas.

Thus, the project to promote the use of the renminbi as a currency for trade settlement in Asia is of vital strategic importance, not so much as a projection of Chinese economic power but as a protection against imported financial turbulence. The inception of a free trade agreement with the 10 members of the Association of Southeast Asian Nations, scheduled for January 1 2010, represents a crucial moment in China’s drive to reduce its trade dependency on the US and Europe and to start reclaiming independence for its monetary policy. To south-east Asians, the attractiveness of the renminbi – a stable, slowly appreciating currency issued by the regional trade giant – may prove considerable. Already, some shopkeepers in Bangkok, Hanoi and Singapore appear happy to accept renminbi as payment.

But little of this presents much hope for foreign investors who anticipate that China’s multi-faceted financial reform programme will result in the speedy lifting of regulations on portfolio inflows. Controls over the capital account are an elemental aspect of Chinese statecraft, a storm barrier for the Middle Kingdom’s bifenggang (“wind-protected harbour”). However, no plan is perfect, and one weakness in the scheme to internationalise the Chinese currency is that if it is successful, there could be so much renminbi liquidity sloshing around in Asia that it could erode away sections of the capital account’s walls and send foreign money spilling over into domestic capital markets.

All this may be years in the future, but for now, the thrust of “globalisation” Chinese-style may derive more from the selective control of the Shenzhen theme park than from any uninhibited embrace of the outside world.

James Kynge is editor of China Confidential, a research service on China at the Financial Times

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