CNH Tracker-China's move to quicken capital reforms may be risky

Thu Dec 5, 2013 12:57am EST

By Michelle Chen and Saikat Chatterjee
    HONG KONG, Dec 5 (Reuters) - As China looks to rapidly prise
open its tightly-controlled capital account, analysts say the
move could have unintended consequences for domestic financial
markets if policy makers fail to carefully calibrate the
    Beijing's expected nod to allow unprecedented freedom for
funds to move across its borders has raised concerns that the
economy is too fragile to handle such volatile capital flows.
     The capital market, for example, is still underdeveloped,
which raises the risk of skewed market pricing as these fund
flows start to impact various assets, the analysts add.
    Forging ahead with financial liberalization without
accompanying reforms in other areas will only push interest
rates higher and force local governments and State-owned
enterprises (SOEs) to default.
    Such a scenario can have a wrenching impact across the local
financial markets -- not to mention globally -- as Beijing is
already battling to bring down trillions of dollars of local
government debt. Piles of loans taken by SOEs and surging
property prices have also raised the spectre of a nasty asset
price collapse.
    This week, the People's Bank of China (PBOC) unveiled
details to develop the newly-launched Shanghai free trade zone
on Monday and surprised the market by allowing much
easier-than-expected cross-border fund flows via the zone.
    Most of these measures will be implemented in the next three
months and experience drawn from the zone will be copied and
extended to other areas in about a year, according to PBOC
Shanghai chief Zhang Xin.
    The reform plan as well as the ambitious timeline to
implement them have surprised market watchers and prompted some
economists like Mizuho's Shen Jianguang to warn that risks for
liberalising the financial sector is rising quickly.    
    "Financial reform must be coordinated with changes in
government functions, SOE reforms, and fiscal reforms. Without
such coordination, lopsided financial liberalization may occur,
and that could easily backfire," Shen said.
    While that ambitious roadmap has been greeted with caution
on the mainland, the excitement is palpable among overseas
market participants with some expecting a fresh impetus to the
growing offshore yuan centers outside Asia.        
    Standard Chartered Bank said on Monday it will
cooperate with Agricultural Bank of China to provide
yuan clearing services in the UK, helping financial institutions
and corporates execute yuan transactions.  
    It is set to breathe fresh life into the declining yuan pool
in London where deposits in private banking accounts stood at
only 2.8 billion yuan ($459.65 million) at the end of 2012, a
fraction of Hong Kong's nearly 800 billion yuan deposit pool, 
according to a June 2013 City of London report.
    In October, Britain said it would ease banking rules for any
non-European bank that wants to set up investment banking
operations in London, a move seen as especially aimed at Chinese
banks to expand their European operations.
    Across a few time zones in Singapore, its stock exchange
signed an agreement to cooperate with each other to promote the
internationalisation of the yuan by exploring joint product
    "The MOU allows us to build on Hong Kong's position as the
premier offshore Renminbi centre by developing closer links with
Singapore and helping regional investors deploy a growing pool
of investable offshore Renminbi," HKEx Chief Executive Charles
Li said.
    The city-state with 140 billion yuan deposits at the end of
July is hurrying to keep its status as he second-largest
offshore yuan pool given the rapid growth in Taiwan this year.
    Regulators in the island recently gave the greenlight to
allow mainland firms to issue yuan bonds there, which already
saw the five biggest Chinese state-owned banks tapping the
market in the past two weeks.

    * China's yuan currency overtook the euro in October,
becoming the second-most used currency in trade finance, global
transaction services organisation SWIFT said on Tuesday.
    * Far East Horizon returned to the dim sum market
on Wednesday and sold a 700 million yuan three-year bond priced
at 5.45 percent, according to a term sheet seen by Reuters. The
book amounted to 1.5 billion yuan with orders from 48 accounts.
    * China Construction Bank is to apply for a branch license
to operate in London following an easing in UK rules on how
overseas banks can be set up, a person familiar with the matter
said on Monday. 
    * Industrial and Commercial Bank of China
  plans to issue 1 billion to 2 billion yuan
of yuan bonds in Taiwan, joining four other major mainland banks
to do so, two sources with direct knowledge of the matter said
on Thursday. 
    China's yuan surpassed the euro in Oct. to become the 2nd
most used currency in trade finance:RECENT STORIES:
CNH Tracker-Taiwan's Formosa bond market to remain a local
Hong Kong offshore yuan deposits seen extending October's rapid
Deutsche, Amundi set for bigger share of yuan funds pie
China's free trade zone plans herald quicker FX reforms

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