China Currency

China, in an ambitious plan, brought out jointly by the country’s economic planning agency and the Shanghai government, intends to make Shanghai the global center of Yuan trading, clearing and pricing by 2015. This is part of a broader plan, first unveiled in 2009, to transform Shanghai, by 2020, into an international financial centre, on par with the likes of New York and London.

National Development and Reform Commission (NDRC), the state economic planning agency, outlined a series of goals under the 2015 Yuan plan, but currency traders are skeptical of the fact that the statement by NDRC, might signal government’s intention to get a tighter grip on the Yuan’s movement, which over the past few months, have increasingly been influenced by the offshore market. NDRC expects Shanghai to generate annual non-forex financial market trading volume of 1,000 trillion Yuan by 2015, up from less than 400 trillion Yuan in 2010. The daily mid-point price published by the Chinese central bank in the onshore Yuan market would be the accepted benchmark for both domestic and foreign Yuan trading markets, and the government-backed Shanghai Interbank Offered Rate, or Shibor, would be the benchmark for Yuan credit everywhere. Overseas companies would also be encouraged to sell Yuan-denominated shares in its domestic markets, and foreign companies would be allowed to list on the Shanghai stock exchange, but the plan did not outline a detailed time-table. Several large foreign companies, like British banking giant HSBC and General Electric of the United States, have evinced interest to list inShanghai, which also wants to explore M&A opportunities involving overseas stock exchanges, to increase its global clout.

Under the apprehension that, sudden large inflows and outflows of the currency could potentially destabilise financial markets and the economy, China tightly controls the Yuan. The United States and other countries have long accused China of keeping its currency artificially low to boost exports. But Beijing defends its exchange rate regime, saying it is moving gradually to make the Yuan more flexible.

Hong-Kong is the main offshore Yuan centre. China, as part of a long-term plan to promote the use of the Yuan overseas and make it a fully-convertible and international reserve currency along with the U.S. dollar, has taken a series of measures  to invigorate the offshore market in Hong Kong .Analysts feel that NDRC’s current plan would not threaten Hong Kong’s dominant position. According to Donna H J Kwok, economists at HSBC inHong Kong, “Promoting Shanghai as an onshore Yuan centre complementsHong Kong’s growing role as an offshore Yuan center, and should help to strengthen the circle of onshore-offshore Yuan flows underpinning the Yuan trade settlement process.”