By Frank-Jürgen Richter
In 1997 China resumed its sovereignty over Hong Kong after having being administered by the UK for 156 years. But there were stipulations: one was that Hong Kong should retain its capitalistic economic system for a further fifty years as drafted under its Basic Law. This permitted Hong Kong to remain somewhat independent of Beijing under the principle of “one country, two systems.” Now, nearly 20 years later, we are seeing many changes as the two draw closer. One notable event is an agreement to link-up the Shenzhen bourse with Hong Kong’s. But this is not an entirely novel situation, it almost copies the link between the Shanghai and Hong Kong bourses that was set up two years ago.
The new trading system, like its Shanghai exemplar, will have daily limits for north and southbound trades. But it will permit large capitalization funds to flow, allowing overseas investors to enter the market and possibly reducing the mainland share prices to more reasonable levels.
In recent years, Beijing has been a little worried by the media attention of capital outflows from China. However, in comparison with the billions of outward direct investment (made easier in this new tie-up) only a few million US dollars could be designated as capital outflow; and some of this represents house purchases for expat families who are educating their children abroad.
Meanwhile there are divergent statements about Chinese outbound foreign direct investment (ODI) levels depending if one looks at data from China’s Ministry of Commerce or from the Brussels think-tank Breugel. The latter group notes the Asian region is the largest recipient of Chinese ODI at $41 billion, Europe is second at $13.9 billion and North America third at $11.4 billion. The rapid rise in Chinese ODI is due to several factors all contributing to the easing of China’s capital account liberalization, but is a little clouded because Hong Kong is classed as “outside” China as a recipient of ODI. Much of that ODI is returned to the Chinese mainland which creates an inflated outward-inward counting – a situation strategists are well-aware of.
A further example of China opening-up is forex trading denominated in yuan in London has grown six-fold in the last four years with average daily volumes exceeding $40 billion. The UK has actively supported broadening the yuan’s use, becoming the first Western government to issue yuan-denominated bonds in 2014. That situation was boosted on June 2 when the first ever Chinese sovereign RMB bond was issued outside of China.
Now, the IMF has included the yuan in its basket of Special Drawing Rights, effective October 1. The three-month benchmark yield for China Treasury bonds will serve as the RMB-denominated instrument in the SDR interest rate basket – further supporting the yuan as an international currency.
There are two other notable banking changes. First, the Postal Savings Bank of China (PSB) is closer to an IPO. It has the Hong Kong stock exchange’s approval and could become the world’s biggest share sale this year, raising about $8 billion. This is an important move since the PSB, which is represented across the whole of China, is an option for people who are excluded from mainstream offers for savings and investments. PSB also provides a remittance network for tens of millions of migrant labourers, letting them send their income from far-flung factories safely back to their families. In March it had 40,057 outlets nationwide, covering 98.9 percent of counties, more than any other bank in China. It also had 505 million retail customers, one for every three citizens. Second, the Hong Kong Monetary Authority has granted approval for its residents to store money in the local version of their online wallets.
Technological change is sweeping through the Chinese financial systems as mobile banking becomes increasingly popular. The payment apps WeChat Pay and Alipay together have at least 500 million users. Most users reside in cities, but it is only a matter of time before the technology spreads further.
When Hong Kong was returned to China it was opined that Shanghai would become China’s great financial center, since its business center has long been regarded as the place where East meets West. Many multinational companies, international banks and international lawyers are headquartered in Shanghai; whereas all the major State-owned enterprises and large domestic companies tend to be headquartered in Beijing. Illustrating the long game, Shanghai’s government has just released a draft development plan in which they aim for the financial industry to make up about one-fifth of local economic output by 2040.
It is clear that China is carefully revising its financial sector and aligning it with global regulations, governance and transparency. This is courageous given the global slowdown in trade in the past few years, the relative instability of the US, the world’s richest nation and the projected withdrawal of the world’s fifth largest economic nation, the UK, from the European Union. By creating deeper banking clarity China will better support its entrepreneurs reaching out to world markets as well as help millions of rural people. It will confer a new vitality in China.
The author is founder and chairman of Horasis, a Swiss-based global visions community organization and host of the annual Horasis China Meeting, the world’s foremost business meeting on China held outside the world’s second-largest economy. firstname.lastname@example.org