Chinese Communist Party 3rd Plenum – Financial
Market Reforms and the Impact on IFCs
December 2013
Contents and Agenda
• China Reform Process and the Communist Party Central Committee 3rd
Plenum
• RMB Internationalisation
• Offshore RMB Market – Hong Kong
• Offshore RMB Market – Singapore
• Offshore RMB Market – London
• UK-China Relationship and David Cameron’s Delegation
• Cicero Research - Attitudes in Hong Kong to the rise of China
Communist Party Third Plenum – 18th C. Committee
Annual or bi-annual meetings of the Central Committee of the Communist Party
Central Committee is the Highest Decision Making Body of the Communist Party
376 members occupy the top posts in China’s administration and military
National Congress held every five years – plenums matter the most
Previous Major Plenums:
•
•
•
•
1984 – countryside reforms
expanded to the cities
1988 – wage and price reforms
1993 – start of systemic market
reform
2003 – refocus on
development and technological
innovation
What are the issues?
Financial Sector Reform: reform of interest rates, Yuan convertibility
State Owned Enterprises: breaking the monopolies in banking, TelCo, energy…
Household Registration: breaking down social barriers and supporting migrants
Land Reform: extending private property rights to the rural class
Local Government Funding: issuance of local government bonds, tackling debt
Environment: balancing development with environmental protection
Middle Income: avoiding the middle income trap
What are the themes?
Four Key Themes
•
Overcoming bureaucracy - new “team” created to drive through reform, reporting
directly to the leadership;
•
Power consolidation - creation of a new “NSC” grabs power from the Central
Committee;
•
Party-led liberalisation - the free market “will be given a decisive role in allocating
resources” but “the Party must give full play to its core role of commanding the whole
situation and coordinating the efforts of all quarters”;
•
Reform of property rights - in particular for farmers and rural-dwellers.
What are the views?
Xu Hongcai, China Centre for International Economic Exchanges:
“The reforms are unprecedented… Reforms in 1990s were
limited to some areas, now reforms are all-round.”
Jack Lew, US Treasury Secretary:
“The direction is significant, but the character and the pace of
change matters.”
Andrew Sheng, Advisor to the CBRC and President of the Fung
Global Institute
“A successful transition to the next phase of wealth creation
– driven by the services sector and knowledge-based
industries – will require a more market-oriented approach, in
which the state cedes some control over the economy and
focuses instead on protecting property rights, administering
welfare services, reducing pollution, and eliminating
corruption.”
What are the reforms?
What are the indicators?
2014 GDP Growth Target
SOE Reform
Target < 7.5% - reforms
prioritised over GDP
Breaking monopolies;
allowing SOEs to fail
Reform Team Leadership
Currency Intervention
Senior figures = reform
programme commitment
PBOC has indicated it will
cease regular intervention
VAT Reform
Shanghai FTZ
Replacing business tax
with VAT in more sectors
Consistent liberalisation of
the “negative list”
RMB Internationalisation
• RMB – currently trades at two exchange rates:
• Onshore – CNY (exchange rate with USD fixed by PBOC)
• Offshore – CNH (traded at a rate of USD/CNH, deliverable RMB in HK)
• CNH market is very small and illiquid, but growing significantly since 2010 reforms
• CNY demand is driven by Chinese exporters looking to convert USD into RMB
• CNH demand is driven by private demand and supply. Supply tightly controlled,
therefore CNH trades above CNY
• CNH market is growing considerably:
• Some foreign corporates allowed to issue CNH-denominated bonds in 2010
(ADB, McDonalds…)
• Capital controls are gradually being lifted allowing foreign investors to invest
CNH in the onshore market
• Liberalising the exchange rate: 3rd Plenum - “China will improve the market
based Yuan exchange rate formation system and speed up the marketisation
of interest rates”
RMB Internationalisation – Four Stages
•
PBOC Governor: Central
Bank will “basically exit”
from regular currency
market intervention
•
Continual widening of
Yuan trading band
•
•
Greater role for markets in
determining prices and
wages
Greater competition –
dismantling the SOEs
Exchange
Rate
Reforms
Interest
Rate
Reforms
Pricing
Mechanism
Reforms
Capital
Account
Reforms
•
Lending rate ceiling
removed
•
Introduction of deposit
insurance scheme in 3 –
5yrs
•
Expansion of QFII and QDII
quotas
•
Scrapping volume limits
•
Increasing convertibility in
banking transactions
RMB Internationalisation – Capital Account Reform
Qualified Foreign Institutional
Investor Programme (QFII)
Qualified Domestic Institutional
Investor (QDII)
•
Launched in 2002
•
Launched in 2006
•
Principal means by which foreign
investors can invest in China’s
securities markets
•
Principal means by which domestic
investors can invest overseas,
principally in fixed income and
money market products
•
Five classifications: commercial
banks, asset managers, insurance
companies, securities companies,
other institutional investors
•
Expanded in 2007 to include stocks
•
Initially HK, now expanded to the US
•
Controlled through quotas set by
CSRC
•
Controlled through quotas set by the
PBOC
•
Managed by SAFE
•
Difficult to repatriate funds
Offshore RMB Markets - Asia
Hong Kong
Singapore
•
2004 - RMB deposits allowed in Hong
Kong
•
2012 – two Chinese banks granted
QFB privileges
•
2004 - Bank of China appointed as a
clearing bank
•
2013 – ICBC appointed clearing bank
for RMB
•
2007 – China Development Bank
issues first RMB bond
•
2013 – PBOC and MAS expand
bilateral currency swap to RMB 300bn
•
2009 – pilot RMB settlement system
•
2013 – MOU signed on “greater RMB
business collaboration”
•
2010 – HKEX launches RMB
securities clearing system
•
2013 – RFQII quota set at RMB 50bn
•
Standard Chartered Index: Singapore
#2 Offshore RMB Centre
•
2013 – 75% of world’s overseas RMB
reserves held in HK
Offshore RMB Markets - London
London - 2013
•
RFQII RMB 80bn Quota
•
RMB 200bn currency swap arrangement
between Bank of England and PBOC
•
Agreement on direct trading between
GBP and RMB offshore and in Shanghai
•
Chinese banks allowed to establish
wholesale branches in London –
previously Chinese banks were forced to
subsidiarise and often based their HQs in
Luxembourg
•
ICBC issues RMB 2bn bond in London
•
November – announcement that Standard
Chartered and Agricultural Bank of China
will offer a clearing arrangement in
London
UK-China Relationship – Cameron’s Trade Mission
•
Pragmatism reigns – no mention of
political or human rights reform
•
Announcement that Standard Chartered
and Agricultural Bank of China will offer a
clearing arrangement in London
•
•
Cameron promises to put his full political
weight behind a China-EU FTA –
eliminating tariffs in 20 key sectors
Chinese investment opportunities in HS2
and further nuclear power schemes
•
GBP200m fund to promote scientific
collaboration
•
GBP4.5bn JLR deal
•
Trending comments on Weibo – China’s
version of Twitter – sum up the difficult
history between China and the UK which
has in the past been a stumbling block to
greater collaboration:
Yongmian: "Mr prime minister, are
you bringing opium with you?"
Glorious Ming: “When will you
compensate us for the Old Summer
Palace?”
Wuyanliuju: “Dalai's friend has come to
China for our silver”
Attitudes in Hong Kong – Constitutional Settlement
The rise and internationalisation of China has a global impact, not least in Hong Kong.
Cicero Research commissioned an online survey of 1000 citizens of Hong Kong earlier in
the year. Questions focussed on the role of Hong Kong as a financial centre, and attitudes
in Hong Kong to the rise of China
For Hong Kong to remain internationally competitive it is important
that it maintains an economy which is open to foreign workers and
investment
Hong Kong Basic Law should be guaranteed in its current form after
the year 2047
There should be greater restrictions on non-Hong Kong citizens
using public services, such as healthcare
4%
9%
6%
It will remain important that the citizens of Hong Kong are fluent in
English
39%
39%
44%
Somewhat agree
Somewhat disagree
28%
35%
52%
32%
54%
33%
Hong Kong should maintain its own strong, distinctive identity
Strongly agree
43%
Strongly disagree
Attitudes in Hong Kong – Constitutional Settlement
Q: Regarding Hong Kong's political freedoms, do you think that the Legislative Council should be...?
Fully elected by citizens of Hong Kong
75%
Partially elected by citizens of Hong Kong, partially appointed by
the government of the People's Republic of China
Fully appointed by the government of the People's Republic of
China
Don't know
23%
0%
2%
Attitudes in Hong Kong – Constitutional Settlement
Q: Do you think that the Chief Executive of Hong Kong should be directly elected by the people of Hong
Kong alone or should they be approved by the State Council of China?
89%
81%
Directly elected by the people of
Hong Kong alone
Approved by the State Council
of China
85%
Male
10%
Female
15%
5%
Don't know
5%
Directly elected Approved by
by the people of
the State
Hong Kong
Council of
alone
China
4% 6%
Don't know
Attitudes in Hong Kong – Cultural Settlement
Q: What do you think is currently the most important
SECOND LANGUAGE for citizens of Hong Kong?
Q: In ten years what do you think will be the
most important SECOND LANGUAGE for
citizens of Hong Kong?
31%
Mandarin
English
69%
49%
51%
Attitudes in Hong Kong – Cultural Settlement
Q: Chinese history and citizenship should be taught in Hong Kong schools - To what extent do you
agree or disagree with the following statements? (Age Breakdown)
49%
18 – 24
22%
63%
25 – 34
12%
66%
Agree
35 – 44
Disagree
10%
72%
45 – 54
7%
83%
55+
2%
Attitudes in Hong Kong – Economic Settlement
Hong Kong will benefit from the internationalisation of China’s financial
markets
8%
Hong Kong SAR should have formal representation in the legislative and
executive system of the People’s Republic of China, such as the State
Council
6%
Chinese history and citizenship should be taught in Hong Kong schools
6%
Strongly agree
Somewhat agree
31%
24%
Somewhat disagree
41%
44%
32%
Strongly disagree
34%
Attitudes in Hong Kong – Economic Settlement
Q: Which of the following do you see as the top biggest obstacles to economic growth in Hong
Kong?
China's influence over political decisions in Hong Kong
49%
The impact of the Eurozone crisis on global trade
39%
Lack of affordable housing
37%
The Western banking crisis
32%
The economic downturn in Asia as a whole
27%
The economic downturn in China
27%
Levels of pollution
21%
Pressures on the education system
13%
Cost of energy
8%
Pressures on healthcare
7%
Pressures on the transport system
None of the above
Don't know
4%
1%
2%
Attitudes in Hong Kong – Economic Settlement
Q: Which of the following do you currently see
as being the most important financial centre in
Asia? (Now and in ten year’s time)
33%
Hong Kong
64%
12%
Shenzen
Don't know
14%
China will become
the world's largest
economy within the
next ten years
14%
38%
Shanghai
Seoul
8%
China will become
the world's largest
economy within the
next five years
16%
Singapore
Tokyo
Q: Which of the following statements do you MOST
agree with?
12%
China will become
the world's largest
economy within the
next twenty years
2%
6%
2%
In 10 Years
1%
Now
2%
0%
8%
5%
25%
39%
The USA will
remain the world's
largest economy
for the foreseeable
future
Don't know
Attitudes in Hong Kong – Economic Settlement
Q: Which of the following do you currently see
as being the most important financial centre in
Asia? (Now and in ten year’s time)
33%
Hong Kong
64%
12%
Shenzen
Don't know
14%
China will become
the world's largest
economy within the
next ten years
14%
38%
Shanghai
Seoul
8%
China will become
the world's largest
economy within the
next five years
16%
Singapore
Tokyo
Q: Which of the following statements do you MOST
agree with?
12%
China will become
the world's largest
economy within the
next twenty years
2%
6%
2%
In 10 Years
1%
Now
2%
0%
8%
5%
25%
39%
The USA will
remain the world's
largest economy
for the foreseeable
future
Don't know
Attitudes in Hong Kong – Economic Settlement
Q: Which of the following is Hong Kong's most
important trading partner now?
Q: Hong Kong is a better place to live because of the end
of British colonial rule in 1997
73%
China
70%
10%
7%
USA
18%
14%
Strongly agree
South East Asia
6%
6%
Europe
5%
Somewhat agree
In 10 years
Somewhat disagree
Current
Strongly disagree
20%
2%
Japan
1%
1%
22%
Don't know
7%
6%
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