The Awakening: Beijing’s financial market opening now well-nigh unstoppable
Western banks and borrowers must prepare for China challenges ahead
by David Marsh
Tue 10 Apr 2012
China’s financial market liberalisation appears now well-nigh unstoppable. The development is being expanded in many fields, with considerable consequences for many sectors of western business and finance.
Cautious opening up of China’s financial markets was initially put on hold in the aftermath of the financial crisis in 2007-08. It could still be impeded by a further sharp world downturn or another type of international dislocation. However, Beijing’s financial liberalisation policies have accelerated as a result of disarray clouding the world’s two principal reserve currencies, the dollar and the euro. The liberalisation extends to use of renminbi in international capital market transactions (especially in Hong Kong, a laboratory for offshore renminbi bonds), in international trade invoicing and settlement and in international reserve holdings (where 10 to 15 central banks worldwide now own serious amounts of renminbi).
Relaxing restrictions on foreign investors bringing funds into China, and gradually taking off the shackles for Chinese investors moving money abroad, are all part of the overall process. The same is true for easing of controls on the value of the renminbi (which is unlikely to appreciate as much as it has in the last 12 months and could fall as well as rise) and for liberalisation of interest rates in China (an essential quid pro quo for allowing Chinese institutions and citizens more freedom to invest abroad).
There is considerable linkage to the latest Five Year Plan for promoting domestic-driven growth and rebalancing exports and imports. Liberalisation of financial markets is part of a package. The moves partly reflect China’s frustration and disillusionment on key issues of international economic and monetary governance and on the poor performance of many private sector western financial institutions during the financial crisis.
However, China will take a steely line on gradually fostering capital account convertibility, declaring that the renminbi can be used more internationally while at the same time remaining partly inconvertible. In the same vein, Beijing emphasises that it reserves the right to ‘shut down’ liberalisation at times of turmoil – for example, in a repeat of the 1997-98 Asian financial crisis.
There are several aspects of China’s financial market liberalisation that the West needs to analyse carefully. They may bring considerable challenges and possible setbacks.
- China’s strong line on international economic governance will eventually mean fewer jobs for the western boys (and girls) at the World Bank / IMF and other international bodies.
- Although China still sees the Europeans as useful allies with whom to push for changes in US-dominated economic fora, Beijing is clearly intensifying its reliance on the other BRICS countries (Brazil, Russia, India and South Africa). Until it solves its internal difficulties over the euro (which won’t be anytime soon), Europe will not really count for much in the world (although individual countries like Germany might).
- China has no wish to destabilise the euro since it relies on Europe for an increasing proportion of its trade. However, over time, probably both the renminbi and the Japanese yen will become more international (Japan is likely to undergo an international renaissance as the Tokyo authorities seek to find ways of borrowing more funds abroad). The increasing global clout of the top Asian currencies will increase the euro’s vulnerability to outside buffetings.
- Higher foreign earnings from international capital market and asset management activities will further increase the power, profitability and status of Chinese banks. Their earnings will come under pressure from liberalisation of Chinese interest rate-setting arrangements, but better conditions for foreign business should provide adequate compensation. Watch out for Chinese banks moving into areas of asset management, trade finance and project finance where western banks previously held comfortable positions.
- Western debtors may find the Chinese may lend only if borrowings are denominated at least partly in renminbi, both to intensify generally the currency’s international use and to protect the creditor against exchange rate losses. Such a stipulation is likely to climb gradually up the international policy agenda in the coming year.
The message for the West is: Be prepared!
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