Shanghai’s stock, bond and spot gold markets are among the world’s largest. Yet, its new plan to become a global yuan trading centre by 2015 looks too ambitious. Without changes like removing capital controls, allowing exchange rate flexibility and opening the financial market, Shanghai can be giant, but not really global.
The plan, endorsed by China’s economic planning agency, sets a goal to double annual transaction volumes before 2015 to $160 trillion, though it doesn’t say what that includes. Shanghai already has the world’s third-largest stock exchange by value of share trading and Asia’s third-largest bond market by bond trading value. But, the markets are still small relative to China’s GDP and it faces obstacles in growing these further.
First, there are China’s capital barriers. As long as offshore investors have only limited access to onshore markets, Shanghai can, at best, be a Chinese yuan trading hub. The central bank may be reluctant to tolerate the kind of massive cross-border movements that London, Tokyo and New York see daily, for fear they could overwhelm China’s protected and under-developed financial system.
The yuan needs to be more freely convertible for a global currency centre to develop. Currently, the central bank sets the mid-point of its trading range every morning, and the currency can fluctuate only half a per cent either way. It’s Beijing, not Shanghai that decides, and there is little sign it’s ready to relinquish control.
Lastly, China needs to open its financial market more for foreign banks. Their assets amount to just two per cent of the total banking assets in China, and they are allowed only limited access in the domestic bond market. Just a dozen foreign securities firms have got licences to operate joint ventures in China. That’s a long way from representing a global centre.
Shanghai now has three years to enlist the help of other powerful departments, such as the central bank and securities and banking regulators. They may be drawn to the status of having a global hub and the idea that Shanghai could set the reference price for yuan-related trades worldwide. But, without key reforms, the city’s greatness will be a mainly domestic affair.
