Recently, I have become very dependent on how Chinese premier Li Keqiang thinks and acts.
He is concerned to put in place the market infrastructure to help China tackle the challenges he will face in the next phase of its economic development. But he is fighting conservatives in the state council who have hitherto dragged their feet on market and financial reform. The premier had to ride rough shod over bureaucratic skepticism to put a shoe in the door and launch the free trade zone experiment in Shanghai, hoping that it will take a life of its own and prove him right. The conservatives in the administration are feeling unconsulted, in the way everyone in the administration were in the days heading towards the WTO agreement in 2001.
The Chinese state council had, on the face of it, approved interest rate liberalization as far back as 1992. But given the deep distrust over any type of liberalization that can give foreigners the upper hand to the local financial markets, the country has been dragging on the implementation aspects of the plan over the years. Today, China does not have the choice. Trade driven direct foreign exchange has slowed down dramatically, causing the central bank to gasp for foreign exchange to sterilize for more renminbi into the local market. The recent liquidity crisis were just the initial hiccups portending worse things to come. Li Keqiang knows, as does the central bank governor, that if they don’t put in place interest rate and capital account liberalization now, later will be too late. Now that he has created a crack in the system, it is now in the hands of the Shanghainese to bring the benefits of liberalized financial assets to life, and then spread to other cities also vying for free trade zone status.
My concern is a much simpler one. I want to run the world’s first Renminbi World Conference in Beijing, China (see http://renminbiworld2013.asianbankerforums.com/ ). Not Shanghai. Not Hong Kong (where there are too many RMB conferences anyway). Not Singapore and not London. But in the heart of the capital city of the country that is driving the use of its own currency globally. Various banking associations, and even my personal friend, a senior regulator, asked us to move the conference to Shanghai. But I said, no, it has to be in Beijing. All the conferences that needs to be had are already being held in the Hong Kongs, Singapores and Londons of the world. Now what the world needs is to hear from top policy makers and influencers in the heart of the capital to decide where everything is headed.
The strange thing about Beijing is that few policy makers in Beijing wants to be quoted on the future of the renminbi. Everything that is happening is happening out there, in Shanghai, in the border cities around Kunming, in Hong Kong and in the other countries that are being approved. It’s not that there is a policy against being quoted. There are no rules, it’s just the way everyone is trying to second guess everyone else.
When Li Keqiang was going to make that historic announcement on Shanghai’s role as the prototype free trade zone, I did consider moving it to Shanghai, if indeed the government was providing clear guidance that the future of the renminbi was going to be in Shanghai. Alas, when he did make the announcement in Shanghai on 28 September, he did not imply that at all. There was nothing sufficient in his announcement to warrant moving our Renminbi conference over. The free trade zone idea did not even require the players to be based in the bonded area to do their business. They just need a table and a chair, much like the off-shore banks have just a table and a chair in Labuan or the Isle of Man.
A lot of press has been created recently about how the renminbi has entered the ranks of the top ten traded currencies of the world. The Chinese love the accolade, even if much of it is self induced. In recent months, it was the Chinese manufacturers using trade instruments to buy renminbi from abroad more cheaply during a period of intense domestic liquidity problems that generated much of the churn. China Development Bank has become the largest lender to emerging markets – a lending book that is now larger than the World Bank, the African Development Bank and the Asian Development Bank combined. So obviously, the someone paying someone else in renminbi outside of China are very likely related to these corollaries.
The renminbi will become a truly global currency when there is harmonization between the domestic and external value of the currency, and international traders have a shot at responding to domestic fundamentals. For this to happen, the country has to open itself up to the uncertainties of the international markets. For that to happen, there has to be greater self-confidence within the leadership. Li Keqiang is working towards ushering that era of self-confidence, by fiat or otherwise. I hope that I am not far behind him in believing that it should come from Beijing and not anywhere else.