Shanghai Aims to Become Global Yuan Trading Center by 2015

By Bloomberg News
January 31, 2012 (Bloomberg)

(Adds comment from law firm in the third paragraph.)

Shanghai plans to become a global center for yuan trading by 2015, open markets wider to foreign investors and almost triple non-currency financial transactions.

The city will allow "significantly more" foreign participation in its financial markets, according to the plan jointly published by the National Development and Reform Commission and the Shanghai government yesterday. Shanghai aims to have about 1,000 trillion yuan ($158 trillion) in financial trading, excluding the currency transactions, by 2015, compared with 386.2 trillion yuan in 2010, the plan said.

"There’s a real chance for them to achieve this but it would depend on the pace of renminbi internationalization and the global economic and financial market environment in the next three to five years," said Hubert Tse, a Shanghai-based partner at law firm Boss & Young that represents qualified foreign institutional investors, private equity and hedge funds in China.

Shanghai's currency market is now largely limited to domestic clients because of controls on capital flows, while Hong Kong has been allowed to start an offshore market for trading the yuan, a denomination of the renminbi. Buyers of yuan still need to seek approval to bring the currency into mainland China for investment purposes.

Trading Volumes

The average daily offshore yuan trading volume reached $2 billion in September 2011, according to a Deutsche Bank AG report in December. The bank forecasts that volume will reach as much as $4 billion this year.

China is approving overseas investment into yuan- denominated shares at the fastest pace in at least 3 1/2 years as foreign-exchange reserves slump and the Shanghai stock index trades near the lowest level since 2009. The regulator awarded 14 licenses last month for qualified foreign institutional investors to trade the nation's stocks and bonds.

The Shanghai Composite Index dropped 0.1 percent today to 2,281.17 as of 1:24 p.m. local time, paring gains for the month to 3.7 percent. It reached the low of 2,132.62 on Jan. 6.

China's economy expanded 8.9 percent in the three months through December, the slowest pace in 10 quarters, as Europe's debt crisis capped export demand and home sales slipped. Foreign-exchange reserves in the world's second-largest economy dropped to a seven-month low of $3.18 trillion on Dec. 31.

The Shanghai interbank offered rate will become the benchmark interest rate for pricing yuan-denominated assets at home and abroad, while the yuan's reference rate will become the key exchange rate, according to the plan. China said in March 2009 it aimed to make Shanghai a world financial center commensurate with the nation’s economic strength by 2020.

"If any nation is to build an international finance center, the nation needs to internationalize its currency," Fang Xinghai, head of the city's financial services offices, said at a press conference today in Shanghai. That can be "jeopardized if we miss the timing to make the renminbi internationalized," he said.

--Luo Jun. Editors: Sandy Hendry, Ven Ram

To contact Bloomberg News staff of this story: Luo Jun in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net