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Wednesday, October 08, 2003

China Reins-in on Institutional Reform

This is not good news for those who look towards a future of serious and substantial institutional reform in China. It is also further evidence that the current attempts to 'browbeat' China into currency flexibility are likely to prove counterproductive:

China is set to postpone indefinitely a landmark scheme that would have opened the Hong Kong stock market to legal investments by mainland institutions. The setback might also delay progress toward satisfying US demands for a more flexible renminbi exchange regime, officials and financial industry executives said.

Official opposition has been building towards any early approval of the Qualified Domestic Institutional Investor (QDII) plan, under which a crack was to be opened in China's closed capital account to allow some mainland funds to change their renminbi into hard currency and invest in Hong Kong's capital markets. "There is really a lot of opposition to QDII at the moment," said one official. "There is no way it will be approved by the end of this year and probably not early next year either." The postponement will come as a blow to investors and the government of Hong Kong, which first proposed the scheme as one of several means to integrate the territory's lacklustre economy with a booming China.

Last month, another Hong Kong proposal to turn the territory into an offshore centre for trade in the renminbi was also relegated to the backburner by Beijing. The main official reason for opposition to the QDII scheme has been that it would divert funds away from Shanghai's languishing stock market, possibly causing further erosion in stock prices.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), the market watchdog, was one of the main opponents of early approval for QDII, officials said. The People's Bank of China, the central bank, which has pledged to ease capital controls selectively to create a more convertible currency, was broadly supportive of the QDII plan but sympathised with the objections of the CSRC at the moment, officials added.

The mothballing of QDII highlights a dilemma for China. On the one hand, it has promised John Snow, US Treasury secretary, that it will move toward a more flexible exchange regime to allay Washington's concerns over a record $103bn (?88bn, £62bn) Chinese trade surplus last year. But on the other hand, the weakness of domestic markets and financial institutions is frustrating progress in this direction.
Source: The Financial Times

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