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Hong Kong and various futures

By China Economic Review

Hong Kong’s role in the present and future of China, beyond the purely economic, is tantilizingly becoming clearer

Hong Kong’s new annual ritual of a march on July 1 caused some interesting repercussions through China’s thinking classes, not all of it negative. The authorities were of course immediately uncomfortable with the sight of hundreds of thousands of Hong Kong residents out on the streets for the second year to take a political position at variance with Beijing’s. But it could be that in the longer term they are more sensitive than it might appear to the inevitabilities of change and to the ways in which change could manifest itself.

The China world today, the thinking goes, contains three political models, three different kinds of “democracy” – the Mainland, Taiwan and Hong Kong.

The mainland model of one party rule with minimal transparency and accountability: not tenable in the context of, say, the next 20 years. The Taiwan model, featuring robust twoparty politics, noisy street rallies, bitterly fought eleections, and the occasional use of baseball bats: unacceptable, even worse than the West.

The Hong Kong model. A high level of transparency and accountability, elections of sorts, relative rule of law and freedom of speech: hmmm, maybe something in there. China Eye was asked by a reader for an opinion on the possibilities for a more open foreign exchange market in China, including the launch of foreign exchange futures. His answers:

Q: What is the probable timetable for floating of the yuan?

A: Not in the foreseeable future. I doubt if there is any timetable or plan for this in place at this point. China’s fiscal authorities are working out how to shift the renminbi from the current fixed exchange rate to a basket of currencies as a way of introducing flexibility into the system. But they face several problems even doing that, not least of which is their basic “control” mentality. There is also enormous pressure from domestic industry to leave the exchange rate alone. If the controls are relaxed the RMB would probably rise in value, making exports less competitive. Also, the Asian Financial Crisis and George Soros (who gets an unfairly bad rap) still cast a shadow over the landscape. Officials remain concerned that a floating yuan would be manipulated by foreign speculators. It can be fairly argued that the levers available to the PBOC and the other authorities are not yet sophisticated enough to handle that kind of challenge.

Q: Is it reasonable to expect a change in China’s forex policy anytime soon?

A: Perhaps a shift to a basket around the end of the year, increasingly unlikely before. But they could well balance the basket to leave the exchange rate virtually unchanged. The base rule for a Chinese official is: if you can get away with doing nothing, do it because it is easier to predict the consequences.

Q: What do you see as the legal/regulatory hurdles to establishing a foreign currency market in China?

A: A forex market already exists, in many ways. The black market, the property market, the stock market, are all in different ways forex related. One of the factors pushing up property prices in the past year is purchases by Taiwan/HK/outsiders betting on a revaluation of the rmb. Controls on forex transactions by companies are being relaxed. Tens of thoudands of not millions of Chinese people buy or sell USD every day as an investment strategy. QDII and QFII, twinned and implemented, will effectively create a channel to circumvent some forex restrictions. Forex trading is a very clean form of trading, very attractive to Chinese gamblers, I mean people. And there are unofficial “bucket shops” out there now, the number of which will definitely grow. Then there’s the Internet. Just as the online gambling world is quite rightly targeting China, so too will the online forex traders. One television channel in Shanghai now features a daily half hour show devoted to the forex market. Why would they do it unless there was retail demand for such information?

Q: What are the prospects for forex futures trading?

New stockNew stockA: My guess is forex futures will be one of the last futures products to be introduced into China. Futures contracts for the basic commodities such as cotton and fuel oil are now being introduced, and the next biggie could be stock index futures, which are seriously needed. A futures market, to work, requires volatility, or the potential of volatility, in the cash market. It is probably China’s strategy to keep the RMB as stable as possible for the foreseeable future, which will inevitably reduce the pressure for, and interest in, forex futures.

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