China’s Game Plan for the future

CHINA was correct in trying to contain the fallout from its market collapse — and is continuing to open up its financial sector, says economist Chi Lo . .

DESPITE the collapse in August of China’s stock markets, Beijing is proceeding surely and steadily in opening up its financial services sector, according to Chi Lo, an author of several books on the Chinese economy.
In the weeks leading up to — and following— the August crash, Beijing continued to bring in measures that allow greater foreign participation in selected segments of its financial markets.
China has started to make structural changes at the margin.
Chi, who is senior economist with BNP Paribas Investment in Hong Kong, told ATI that the changes have not been sufficiently reported in international media, which has been preoccupied with the measures Beijing took to shore up its share markets.
To Chi, an important observation is the fact that the Chinese leadership is starting to listen to the international markets. “Beijing is learning very fast,” he says.
Chi says Beijing was right in trying to contain the fallout of the market collapse.
The Government has introduced new measures which convince him that China is still on track with reforms.
In September, China relaxed regulations to encourage convergence of onshore and offshore trading of the RMB by allowing more multinationals to participate in cash-pooling and by raising the limit five-fold of RMB cash that can be put into the RMB cash pool.
He notes that foreign central banks are now permitted to trade in the inshore Chinese RMB fixed income market without approval. Until recently, central banks from other countries were not able to trade in this market without quotas and licenses.
Even more recently, foreign central banks have been allowed to trade in China’s onshore foreign exchange market without restriction. They can trade directly on the Chinese yuan market (CNY, as
opposed to CNH offshore) without the need of quotas.
Before China’s September announcement, foreign central banks had to obtain a trade quota from the State Administration of Foreign Exchange (SAFE), and even then, trading was restricted to Chinese State bonds. Now, they are able to trade in State bonds, bond options, bond futures and interbank swaps.
Since September, however, Chi says these regulations have gone off the statute books. “There is no need for quotas from SAFE or the central bank (the People’s Bank of China) and foreign central banks are free to do any amount of trade they wish,” he says.
“All they need to do is to fill up a one-page form to let the Chinese central bank know what they plan to do.”
Chi says Beijing has designated more RMB clearing banks, and there is now one in each offshore centre.
Designated banks in these centres are no longer restricted from trading onshore repos (repurchase agreements widely used as a financing instrument by holders of debt securities — they play an important role
in assisting the smooth functioning of debt markets).
 “Two months ago, offshore banks, including RMB clearance banks, could not trade repos inside China. Now they can access the repo market onshore, which means that they can
increase liquidity through repurchase agreements with onshore counterparts.”
These are all small steps, but they are right steps to take, Chi says. The point, he argues, is that the changes have been overlooked by the international media.
Chi adds that under China’s agreement with Hong Kong on mutual recognition, funds sold in China or Hong Kong are recognised by the respective authorities.  This means that Hong Kong authorities recognise Chinese funds sold in Hong Kong and vice versa. “I see this as another opening move in terms of  asset trading in mutual funds.”