China Watch Blog

China Watch Blog has picked up this news from Xinhua that the central parity rate of the yuan, China’s currency Renminbi (RMB) or yuan, strengthened 30 basis points to 6.7973 per U.S. dollar Friday from 6.8003 per U.S. dollar Thursday, according to the data released by the China Foreign Exchange Trading System.

China’s central bank announced on June 19 this year that it would further the reform of the formation mechanism of the yuan exchange rate to improve its flexibility.

The central parity rate of the yuan advanced to a record high 6.7715 against U.S. dollar on August 4 since the reform.

So, US importers buying Chinese products will face even higher prices due to the yuan’s appreciation versus the US dollar. And this is not very good news for Chinese exporters as US buyers will be facing more expensive Chinese goods.

China Watch Blog has learnt that the Chinese government is considering allowing companies to use its currency- the Renminbi or yuan – on overseas investments as a next step on the reform to facilitate cross-border yuan flow, Hu Xiaolian, deputy governor of the People’s Bank of China, said Tuesday.

However, according to a Global Times report, Liu Yu, official from the Institute of Finance and Banking under the Chinese Academy of Social Sciences (CASS), says a bigger issue is whether countries will accept the yuan on transactions.

Hu also said that China will also launch a mini Qualified Foreign Institutional Investor (QFII) plan, in which it will allow offshore yuan deposits back into the mainland’s capital market.

China Watch Blog picked up this news that US Commerce Department announced on Tuesday its decision not to initiate investigation on allegations that China’s currency practices constitute an unfair subsidy.

According to a China Daily report, the currency allegations under review were made in the context of countervailing duties (CVD) investigations of two Chinese products — aluminum extrusions and coated paper.

“Two allegations before it that China’s currency practices constitute an unfair subsidy under US countervailing duty law failed to meet the requirements for the initiation of an investigation,” the Commerce Department said in a statement.

“Today’s currency decision was based on a careful evaluation of the specific legal arguments and evidence put before the department, in relation to the standards for the initiation of an investigation under the CVD law,” Deputy Assistant Secretary for Import Administration Ronald K. Lorentzen said.

“In these two cases, the Department has determined not to investigate whether the alleged undervaluation of China’s currency, the renminbi (RMB) or yuan, is a countervailable subsidy,” it said.

Lorentzen said the department made the decision because “the allegations made by domestic producers do not meet the statutory standard for initiating an investigation under the requirement that benefits provided under China’s unified foreign exchange regime be specific to the enterprise or industries being investigated.”

China Watch Blog has learnt that the Chinese government has approved a plan to boost service sector cooperation between the booming southern city of Shenzhen and Hong Kong, Xinhua reported, citing local authorities.

Under the plan, Shenzhen will build a 15-square-km service industrial zone in Qianhai in Nanshan district, said Xu Chongguang, deputy director of the Shenzhen municipal committee of planning, land and resources.

Xu said Shenzhen would invest 40 billion yuan ($5.9 billion) to build the zone that will house financial institutions and logistics, technology, telecommunications, media and commercial companies.

It is estimated that the zone’s gross domestic product DP) ill grow to 150 billion yuan by 2020.

“Financial cooperation between Shenzhen and Hong Kong will be a main priority for the Qianhai zone,” said Li Lin, director of the municipal finance office.

The Renminbi (yuan) settlement business is a breakthrough for the two sides’ financial cooperation, Li said.

Fang Yan, an analyst with Guosen Securities, said the zone would become a bridgehead for foreign capital to enter China and domestic businesses to expand in the world.

Shenzhen marked its 30th anniversary as a special economic zone on Thursday.

China Watch Blog has learnt that a gradual and orderly appreciation of the renminbi might reduce the external demand for Hong Kong dollar banknotes, but the magnitude would not be large, according to the minutes of the Exchange Fund Advisory Committee Currency Board Sub-Committee’s meeting.

The sub-committee noted a paper estimating the amount of Hong Kong dollar currency, mostly in the form of high-denomination banknotes, circulating in Mainland China and Macau had reached $100-140 billion, mainly reflecting increased economic integration between the Mainland and Hong Kong.

In the event that the continued appreciation of the renminbi led to a repatriation of the banknotes back to Hong Kong, the effect on the Hong Kong dollar exchange rate and interest rates would be minimal.

The sub-committee noted financial strains in Europe are likely to continue, with a confluence of sovereign and bank risks weighing on global financial stability.

Economic recovery in the US has slowed. The austerity measures introduced by the governments in Japan, the UK and some European countries have added uncertainties to the economic outlook. Europe’s financial problems could also dampen global demand.

Growth momentum on the Mainland is likely to moderate in the coming months. While inflationary pressures were expected to ease, the current macroeconomic policy stance was likely to be maintained.

In Hong Kong, economic growth had likely slowed in the second quarter. Downward pressures on external demand would persist, and concerns about sovereign risks in the euro area would continue to threaten financial market stability.

The sovereign debt problems in the euro area and the Mainland’s policy tightening might cause some slowdowns in the economic growth in 2010. Inflationary pressure might surface on renewed capital inflows into the Asian region in view of its better growth prospect relative to the advanced economies.

China Watch Blog has picked up this news about the Yuan. The People’s Bank of China will launch a pilot scheme for the Renminbi Clearing Bank and other eligible institutions outside the Mainland to make use of their renminbi funds to invest in the Mainland’s interbank bond market.

The Clearing Bank and participating banks of renminbi business in Hong Kong can conduct trading in the Mainland’s interbank bond market upon approval by the People’s Bank of China.

The Hong Kong Monetary Authority will liaise with the People’s Bank of China on the implementation of the scheme, and will issue a circular to authorised institutions. The authority’s Chief Executive Norman Chan said the launch of the scheme has opened up a channel for renminbi funds and financial institutions in Hong Kong to invest in the Mainland.

“This will further promote the development of renminbi trade settlement in Hong Kong, and enhance the attractiveness of RMB offshore business in Hong Kong.”

Under the scheme central banks and monetary authorities outside the Mainland can also invest in the Mainland’s interbank bond market.

China Watch Blog has learnt that Hong Kong could draw as much as 100 billion yuan worth of yuan-denominated bank deposits this year, underscoring the city’s growing dominance as an offshore centre for the yuan.

Deposits reached 89.7 billion yuan at the end of June, according to government statistics. The total was likely to climb as high as 100 billion yuan by the end of the year, Xinhua said, citing a Hong Kong Association of Banks official.

The association hoped more institutions would issue yuan-denominated bonds in Hong Kong, Xinhua quoted the official as saying on Saturday.

Hong Kong’s Securities regulator has approved the city’s first yuan-denominated fund, run by the local unit of the mainland’s Haitong Securities – another sign of Beijing’s bid to make the yuan a major global currency.

Haitong said the fund will initially focus on investments in offshore yuan-denominated fixed income products such as bonds and commercial paper.  Hong Kong has been expanding the scope of yuan-based business since it started taking yuan deposits in 2004, AFP said in a report.

The People’s Bank of China, China’s central bank, has asked its branches to effectively implement a moderately loose monetary policy in the second half of the year, the People’s Daily reported, citing a Xinhua report.

The bank urged maintaining the continuity and stability of monetary policies while making them more targeted and flexible, according to a statement on the bank’s website after a meeting with branch presidents.

It also urged adhering to the policy of striking a balance between keeping stable and relatively fast economic growth, adjusting the economic structure and managing inflation expectations.

It asked its branches to stick to its annual lending target while maintaining market liquidity at a reasonable level.

Housing loan policies should be strictly implemented to ensure the stable and healthy development of China’s real estate market, the statement said.h China’s monetary policy should be more proactive, targeted and effective, the statement added.

The central bank has set a target to keep the country’s new bank lending to below 7.5-trillion-yuan (1.1 trillion U.S. dollars) in 2010.

In the first half of the year, China’s new yuan-denominated lending hit 4.63 trillion yuan, down 2.74 trillion yuan from the same period last year.

China Watch Blog picked up this headline in SCMP’s Business Post yesterday that “Shanghai drops offshore yuan trading hub dreams”, and will instead merely complement Hong Kong in global currency drive.

How noble of Shanghai to do so! Vice-Mayor Tu Guangshao told a finance forum that the Mainland’s richest city, Shanghai, would hone its image as an onshore rather than an offshore centre, playing a complementary role to HK as the two cities jointly reinforce the yuan’s internationalisation drive.

This move leaves Hong Kong a clear lane to remain the dominant market for offshore trading of the Reminbi – the Chinese currency.

Probably one of the reasons Hong Kong, rather than Shanghai, is spearheading this drive is because the former British Colony has all the connections and what it takes to achieve the “yuan globalisation role” better than Shanghai.

China Watch Blog reports that the Hong Kong Monetary Authority and People’s Bank of China have signed a supplementary memorandum of co-operation on the expansion of the renminbi trade-settlement scheme.

The two bodies will strengthen co-operation and further promote Hong Kong’s status and role as a renminbi market platform in the process of developing renminbi business outside the Mainland.

The bank and the Renminbi Clearing Bank, Bank of China (Hong Kong) Limited, also signed a revised settlement agreement on the clearing of renminbi businesses.

Monetary Authority Chief Executive Norman Chan said, following the revision of the settlement agreement, there will no longer be restrictions on banks in Hong Kong in establishing renminbi accounts for and providing related services to financial institutions; and individuals and corporations will be able to conduct renminbi payments and transfers through the banks.

“I expect that many more types of financial intermediary activities denominated in the renminbi will be introduced in the market, helping Hong Kong’s renminbi business platform leap to new heights.”