Over the past couple years China has been making strides to expand the use of the renminbi for international trade as apposed to using the US dollar as an intermediary. With a growing Chinese economy and a weakening USD, increased use of the renminbi protects global trade from the desperate moves made by the US Federal Reserve. The Financial Times reports on this big economic development:
China plans to create a special zone to experiment with currency convertibility in Shenzhen, the city where it introduced key economic reforms three decades ago.
The measure will enable Hong Kong banks to lend renminbi directly to companies in Qianhai Bay – a new economic zone on a peninsula across the water from Hong Kong – according to Chinese state media.
Analysts say the experiment could prove as critical to eventually dismantling capital controls as Deng Xiaoping’s reforms were to opening China to the world.
Foreign institutions have also been given a limited but growing array of investment options for their renminbi holdings, such as Hong Kong’s dim sumbond market and a programme for buying Chinese equities.
Liu Ligang, an economist at ANZ, said the risks of the latest measure were greater than those attached to the 1980s opening.
“Money is fungible. Like water, it flows to low levels. So if money can flow from Hong Kong to Qianhai, the money will flow from Qianhai to other parts of China that can offer higher returns.”
He said China had to ease its control of interest rates and deepen the domestic bond market before opening the capital account to lessen the risk of speculative capital rushing in and local companies accumulating dangerously big foreign debts.
