Time for Next Move on Yuan Liberalization

Peter Stein reports for The Wall Street Journal that last year, China made waves by letting foreign investors get their hands on more of its currency. This year, the big question for many is what China will let them do with that money.

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AFP/Getty ImagesA Chinese bank worker counts a stack of 100-yuan notes at a bank in Hefei, east China’s Anhui province on February 27, 2011.

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0228yuan01

The first stage of a grand experiment took place last year, when China put in place measures that let people outside its borders for the first time trade in the currency of the world’s second-biggest economy, creating a new market for offshore yuan and yuan-based securities.

The take-up has been swift and enthusiastic. Daily trading in offshore yuan now totals more than $600 million, according to Deutsche Bank AG. That’s small by the standards of the $4-trillion-a-day foreign-exchange market but up sharply from only around $100 million in October. After helping sell about 36 billion yuan ($5.48 billion) of “dim sum bonds” last year in Hong Kong, bankers reckon this year’s issuance could easily double that figure. One company is already working on launching what could be Hong Kong’s first ever yuan-denominated share offering.

The reforms are having a global impact, allowing traders in London and New York to buy and sell what was until recently an isolated, walled-off currency. But the impact in Hong Kong, an offshore finance center that’s nonetheless part of China, is especially powerful. Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, told investors at a Goldman Sachs conference last week the ex-British territory’s role as incubator of this new market is “probably the most important development in Hong Kong’s evolution as an international financial center in recent decades.”

Feeding this market are the piles of yuan mounting in this city’s bank accounts. These totaled 314.9 billion yuan ($47.9 billion) as of Dec. 31, up fivefold from a year earlier, boosted by Beijing’s efforts to promote use of yuan over dollars to settle China’s overseas trade deals, as well as by expectations that the yuan’s value will continue to rise over time. Economists are expecting those deposits to reach anywhere between 500 billion and 1 trillion yuan by the end of the year.

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