Transcript A. The Impact on Mainland China`s Economy (continued)

The Full Convertibility of the Renminbi:
Sequence and Impact
Drafted by Shucheng Liu and Zhijun Zhao
Hong Kong Institute for Monetary Research
and
Economic Institute, Chinese Academy of Social Sciences
Research Project Group:
Yue Ma
Associate Professor, Economics Department, Lingnan University
Yak-yeow Kueh
Chair Professor, Economics Department, Lingnan University
Shu-ki Tsang
Professor, Economics Department, Hong Kong Baptist University
Matthew Yiu
Manager, Hong Kong Institute for Monetary Research
1
This paper was written while we were visiting Research Fellows at the
Hong Kong Institute for Monetary Research. We wish to thank the
HKIMR for their hospitality and support.
The views presented in this paper are those of the authors and do not
necessarily reflect those of the HKIMR.
1. Introduction
This paper discusses the sequence of the Renminbi’s full
convertibility and its possible impact on mainland
China’s economy and Hong Kong’s economy.
2
1. Introduction (Continued)
China’s entry into the World Trade Organization (WTO) will
effectively speed up the full convertibility of the Renminbi.
•
Foreign banks will be allowed to make corporate loans in
local currency within two years of entry
•
Foreign banks will be allowed to deal with individual Chinese
customers within five years after entry.
Some people thus point out that these measures mean the Renminbi
will soon become a fully convertible currency. We think this
viewpoint is incorrect.
3
1. Introduction (Continued)
It is because this viewpoint confuses the capital account
convertibility with the Renminbi’s full convertibility. It also
confuses removing restrictions on transactions with removing
restrictions on exchange.
The measures mentioned above are just important steps towards
removing restrictions on capital account transactions. They are
not yet equivalent to capital account convertibility and still far
from the Renminbi’s full convertibility.
4
1. Introduction (Continued)
The paper is organized as follows.
•
•
•
•
Section Two focuses on the sequence of the Renminbi’s full
convertibility.
Section Three develops a general equilibrium model for an
open economy.
Section Four analyses the possible effects of the Renminbi’s
full convertibility on mainland China’s economy and Hong
Kong’s economy.
Section Five provides the conclusions.
5
2. Sequence of the Renminbi’s Full Convertibility
A. A review of the experience of developed industrial countries
B. Three stages in the Renminbi’s full convertibility
After World War Ⅱ, developed industrial countries
stepped towards the capital account convertibility in
a relatively cautious way.
(See Table 1 and Table 2)
6
Table 1
Currency’s Convertibility in Developed Industrial Countries
(In Order of the Time When Establishing Capital Account Convertibility)
Countries
USA
Germany
Great Britain
Switzerland
Japan
Australia
New Zealand
Netherland
Denmark
France
Sweden
Austria
Italy
Belgium
Luxembourg
Norway
Ireland
Finland
Spain
Portugal
Greece
Iceland
Time When
Establishing Current
Account Convertibility
Time When
Establishing Capital
Account Convertibility
1946
1961
1961
1992
1964
1965
1982
1961
1967
1961
1961
1962
1961
1961
1961
1967
1961
1979
1986
1988
1992
1983
1973
1975
1979
1980
1980
1983
1984
1986
1988
1989
1989
1990
1990
1990
1990
1990
1990
1990
1993
1993
1994
1995
Length of the Interval Between
Current Account Convertibility and
Capital Account Convertibility
(years)
27
14
18
- 12
16
18
2
25
21
28
28
28
29
29
29
23
29
11
7
5
2
12
7
Table 2
Currency’s Convertibility in Developed Industrial Countries
(In Order of the Interval Time between Current Account
Convertibility and Capital Account Convertibility)
Countries
Italy
Belgium
Luxembourg
Ireland
France
Sweden
Austria
USA
Netherland
Norway
Denmark
Great Britain
Australia
Japan
Germany
Iceland
Finland
Spain
Portugal
New Zealand
Greece
Switzerland
Length of the Interval Between Current Account Convertibility
and Capital Account Convertibility (years)
29
29
29
29
28
28
28
27
25
23
21
18
18
16
14
12
11
7
5
2
2
- 12
8
B.
Three Stages in the Renminbi’s Full Convertibility
There does not exist a uniform or fixed sequence of the currency’s
full convertibility due to the differences across countries.
At the same time, based on the common practice and basic
sequence taken by most countries in the world, drawing on the
experience and lessons from other countries’ practice and in view
of the fact that China is a large developing country, we believe
that a steady and carefully designed sequence is needed.
9
B.
Three Stages in the Renminbi’s Full Convertibility (continued)
The whole course of the Renminbi’s full convertibility, we think, should be
broken down into three major stages in general.
Stage One, Adopting current account liberalization. (It was established
by 1996.)
Stage Two, Adopting capital account liberalization. (It’s currently going on.)
Stage Three, Adopting the Renminbi’s full convertibility. (It will take place in
the future.)
As to the stage of current account liberalization and the stage of capital account
liberalization, each should be further broken down into two successive steps.
Step One,
Removing restrictions on current account or capital account
transactions.
Step Two,
Removing restrictions on current account or capital account
exchange, namely adopting current account or capital account
convertibility.
(See Table 3)
10
Table 3
Sequence of the Renminbi’s full convertibility
Stage One
Current account liberalization
Step One
Step Two
Removing restrictions on transactions
Removing restrictions on exchange
It was established by 1996.
Stage Two
Capital account liberalization
Step One
Step Two
Removing restrictions on transactions
Removing restrictions on exchange
It’s currently going on.
Stage Three
Renminbi’s full convertibility
It will take place in the future.
11
Stage One
Current account liberalization
Step One
Removing restrictions on transactions
Removing current account restrictions on transactions
means removing restrictions on current international
transactions themselves and still retaining current
account restrictions on exchange, i.e. retaining the
examination and approval system relating to current
account exchange.
12
Stage One
Current account liberalization
Step Two
Removing restrictions on exchange
On the basis of having removed some or most of current account restrictions on
transactions, a country can further remove current account restrictions on
exchange, namely adopting current account convertibility. It means removing
the examination and approval system relating to current account exchange and
only retaining audit on the authenticity of transactions.
According to Article 8, Section 2(a) of the IMF’s Articles of Agreement，current
account convertibility means that no member shall, without the approval of
the Fund, impose restrictions on the making of payments and transfers for
current international transactions.
13
Stage Two
Capital account liberalization
Step One
Removing restrictions on transactions
Removing capital account restrictions on transactions means
removing restrictions on capital international transactions
themselves and still retaining capital account restrictions on
exchange, namely retaining the examination and approval
system relating to capital account exchange.
China has been generally on the process of removing capital
account restrictions on transactions. In 1979, it began to
reform and open to the outside world. In 1996, it established
current account liberalization.
14
After China’s entry into WTO, a number of restrictions on capital account transactions
will be lifted. The main measures are as follows:
Direct investment aspect:
(1) Foreign banks will be allowed to engage in joint ventures immediately upon entry.
Restrictions on percentage of foreign equity stakes in banking will be lifted within five
years after entry.
(2) The new policy would allow multinational corporations to invest in large- and
medium-scale state-owned enterprises and to increase their equities above the 49 per cent
ceiling on most state-owned enterprises except companies in certain key industries.
(3) The new policy would lift restraints on foreign enterprises taking out Renminbidenominated project financing.
(4) China will open its insurance sector. Foreign insurance companies would be
permitted to hold up to 50 per cent of life insurance joint ventures with local companies
immediately upon entry. Foreign non-life insurers would be allowed to hold 51 per cent of
Sino-foreign joint ventures upon WTO entry, and would be allowed to establish whollyowned subsidiaries within two years. Geographical restrictions on foreign insurance
companies would be phased out within three years of entry. Within five years, foreign
insurance companies would be allowed to expand into group, health and pension
insurance.
15
(5) China will open other service sectors, including telecommunications, trade and
tourism besides banking and insurance.
(6) The new policy would expand the range of services and trade sectors in the
western part of China that would be opened to foreign enterprises.
Portfolio investment aspect:
(7) China has opened the door for foreign venture-capital firms to directly establish
such funds. New regulations will allow them to take their venture-capital companies
public on the Chinese equity market.
(8) Foreigners could invest in the Chinese brokerages in 2004.
(9) Foreigners would be allowed to invest directly in the domestic stock market by
2006.
(10) A foreign-invested joint-stock limited company which meets requirements
would be allowed to issue A or B shares domestically.
16
Other investment aspect:
(11) Foreign banks will be allowed to conduct domestic currency business with
Chinese firm within two years after entry and then with Chinese individual within
five years of entry.
(12) Geographic restrictions on foreign banks will be lifted after five years. Foreign
banks will be allowed to offer Yuan services in four cities upon accession, with
four more cities added each year thereafter. Nationwide market access is due in five
years.
(13) Foreign banks may capture more than half the domestic market for fee-based
banking services such as trade financing, credit card transactions and cash
management.
(14) Foreign-funded financial institutions would be allowed to provide credit
guarantees and foreign-funded enterprises would be permitted to provide foreignexchange collateral.
17
Stage Two
Capital account liberalization
Step One
Removing restrictions on transactions (continued)
Note that the measures mentioned above are just important steps towards
removing restrictions on capital account transactions. They are not yet
equivalent to capital account convertibility and still far from the Renminbi’s
full convertibility.
For instance, by that time, resident individuals may be able to deposit
Renminbi in foreign banks residing in China, but what they can draw from the
banks is still Renminbi and not foreign currency. If resident individuals want to
draw out foreign currency to pay for capital international transactions, they
still need, in accordance with the China’s relevant regulations, to go through
the procedures relating to exchange.
18
Stage Two
Capital account liberalization
Step Two
Removing restrictions on exchange
On the basis of having removed some or most of capital account
restrictions on transactions, a country can further remove capital account
restrictions on exchange, namely adopting capital account convertibility.
It means removing the examination and approval system relating to capital
account exchange and only retaining audit on the authenticity of
transactions.
Until now, there still exist strict capital account exchange restrictions that
need to be lifted up step by step in due course.
19
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
(1) Direct investment
Regarding foreign direct investment, some exchange restrictions have
been lifted up already.
The remaining restrictions are the prohibitions against the remittance of
foreign exchanges into China as an investment by overseas legal persons
or natural persons. These foreign exchanges could only be settled with the
approval of the State Administration of Foreign Exchange (Regulations on
the Administration of Settlement, Sales and Payment of Foreign Exchange).
20
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
(1) Direct investment
Concerning China’s direct investment
exchange restrictions are also very strict.
abroad,
current
Under the existing rules, when making an investment abroad,
institutions residing in China shall receive an audit on the
source of their exchange capital by foreign exchange
administrative agency.
(Rules on Foreign Exchange Administration of the People’s Republic of China)
21
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
(2) Portfolio investment
With regard to issuing securities to foreigners and opening
domestic securities market, exchange restrictions are still very
strict. Under the existing rules, foreign exchange received
from issuing foreign currency stocks and bonds could not be
settled without the approval of State Administration of Foreign
Exchange
(Regulations on the Administration of Settlement, Sales and Payment
of Foreign Exchange).
22
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
(2) Portfolio investment
With respect to purchasing foreign securities, exchange restrictions are
also very strict. Under the existing rules, institutions and individuals
residing in China are forbidden to buy foreign exchange for the purpose of
purchasing foreign currency stocks issued abroad.
(Circular on Relevant Issues Regarding Perfecting Foreign Exchange
Administration Relating to Capital Account.)
(Provisional Measures on Foreign Exchange Administration Relating to
Individuals Residing in China.)
23
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
(3) Loans
For loans, restrictions on exchange are also extremely strict
currently.
Under the existing rules, without the approval of State
Administration of Foreign Exchange, institutions residing in
China could not deposit abroad the raised international
commercial loans, use them for overseas direct payment or
convert them into Renminbi (Measures on the Administration of Raising
International Commercial Loans by Institutions Residing in China).
24
Stage Two
Capital account liberalization
Step Two Removing restrictions on exchange (continued)
We can see from the above analysis that on the whole,
there is still a lot to do in the removal of various
restrictions on capital account transactions and
exchange. The removal of restrictions cannot be
accomplished in a single action.
25
Stage Three
The Renminbi’s full convertibility
The Renminbi’s full convertibility means removing in all
respects exchange controls relating to the Renminbi,
removing audit on the authenticity of current account and
capital account transactions and allowing the Renminbi’s
convertibility without the occurrence of any real transactions.
This clearly could not be established within five years after
China’s entry into WTO.
26
3.
A General Equilibrium Model for an Open Economy
Adopting the Renminbi’s full convertibility will involve a very broad
range of areas, including macro-economy and micro-economy, real
economic activity and financial activities, internal and external economic
balances, price, interest rates and exchange rates, etc.
In order to analyze the possible effects of the Renminbi’s full
convertibility on mainland China’s economy and to analyze the interaction
between the Chinese economy and its foreign counterpart such as Hong
Kong, we will develop an open macroeconomic general equilibrium
model with micro foundations. Each economy in the model is assumed to
be composed of a representative consumer and a firm.
27
The Behavior of a Representative Consumer
The objective of a representative consumer is to maximize the
present value of his life utilityU t :

Ut    st [u1 (Ccc,s )  u2 (qs Cch,s )  u3 ( Bcc,s / Pc,s )]
s t
 u4 ( Bch,s qs / Ph,s )  u5 (M cc,s / Pc,s )  u6 (M ch,s qs / Ph,s )
(1)
The representative consumer is bound by a flow budget constraint at
time t:
Ccc,t  q t Cch,t  (Bcc,t - Bcc,t -1 )/Pc,t  q t (Bch,t - Bch,t -1 )/Ph,t  (M cc,t - M cc,t -1 )/Pc,t
 q t (M ch,t - M ch,t -1 )/Ph,t  w  rc,t -1Bcc,t -1 / Pc ,t  q t rh,t -1Bch,t -1 / Ph ,t
(2)
28
The Behavior of a Representative Firm
The objective of a representative firm is to maximize his profits Pr :
Pr  A(kcc,t   kch,t  ) (bcc,t  bhc,t )(1 i c,t )  wc,t 1
(35)
The representative firm is bound by a flow budget constraint
at time t:
kcc ,t  q t kch ,t  bcc ,t  bhc ,t
(36)
29
Solution:
Using the Lagrange function and some assumptions, we get the explicit
solution for a representative consumer :
C
ch , t
b cc , t


2
q t b ch , t 

b ch , t 
cc , t
m ch , t 
1

qt

(23)
4
1   (1  i h , t )
or
m
(22)
q t
3

1   (1  i c , t )
q t 1
qt
4
1   (1  i h , t )

5
1   / 
1

qt
q t 1
qt
c ,t  1
6
1 
q t 1
/
qt
(24)
(25)
(26)
(27)
h ,t 1
30
Solution:
Using the Lagrange function and some assumptions, we get the explicit
solution for a representative firm:
 A
k cc , t  
 1  i c ,t




1
1


A

k ch , t  

 ( 1  i c ,t )q t 
w c ,t  1  ( 1   ) y c ,t  1
 A
y c , t  1  A [ 
 1  i c ,t
 A

1
 

1 i
c ,t










1

1
1
1
(38)

A
 
 ( 1  i c , t )q t


1 


 1 


 qt 

1





1
]





31
4.
The Impact of the Renminbi’s Full Convertibility on Mainland
China’s Economy and Hong Kong’s Economy
A. The Impact on Mainland China’s Economy
The above general equilibrium model gives us an analytical
framework to study the impact of the Renminbi’s full
convertibility on mainland China’s economy.
Through model analysis, we will further find that several
conditions are necessary for the Renminbi to become fully
convertible, including appropriate macro-economic policy,
micro-sided enterprise reform, financial system reform, marketoriented interest rate reform and more flexible exchange rate
policy, etc.
32
A. The Impact on Mainland China’s Economy
The process of the Renminbi’s full convertibility will
have an extensive effect on mainland China’s
economy.
As suggested by the experience of most countries in
the world, the most noticeable accompaniment of
capital account liberalization will be the massive
inflow of foreign investment.
33
A. The Impact on Mainland China’s Economy (continued)
In our general equilibrium model, foreign investment inflow is represented
by external bond issued by domestic firms, bhc, the solution is given by
equation (29).
b hc , t 
 h3
1   h (1  i c , t )
(29)
In equation (29), (1+ ic,t ) is the real interest rate of the bonds issued at
home.
Equation (29) indicates that foreign demand for domestic bonds, bhc, is
positively related to their real interest rate, (1+ ic,t ) , that is, the higher the
rate of return of domestic bonds, the greater the amount of foreign
investment in them. This is an important reason for the influx of foreign
investment after the opening of capital account.
34
A. The Impact on Mainland China’s Economy (continued)
With respect to the effect of massive inflow of
foreign investment, we can make an analysis
from two angles, namely the effect on real
economic activities and the effect on financial
activities.
We begin our analysis with the effect on real
economic activities.
35
A. The Impact on Mainland China’s Economy (continued)
The massive inflow of foreign investment, namely an increase in bhc, will
cause an increase in domestic capital goods. This is reflected in the
equilibrium condition (42) of our model.
k cc ,t  k ch ,t q t  b cc ,t  b hc ,t
(42)
The increase in bhc will lead to the increase in domestic capital goods
(including capital goods produced at home, kcc, and capital goods imported
from abroad, kch), which in turn, through equation (34) of our model,
namely the production function, lead to an increase in domestic output, yc.
y c , t  1  A [ k cc

,t
 k ch

,t
]
(34)
36
A. The Impact on Mainland China’s Economy (continued)
The increase in domestic output, yc, will, through equation (38),
further result in a rise in domestic wage, wc.
w
c ,t  1
 ( 1   ) y c ,t  1
(38)
The rise in domestic wage will, through consumers’ budget
constraint equation (2), raise domestic consumption, Ccc, and the
increase in Ccc will, through consumers’ objective function (1), lead
to a higher level of consumers’ welfare and utility.
37
A. The Impact on Mainland China’s Economy (continued)
In the above chain-reaction, the most important links are
equation (42) and equation (34). The massive inflow of
foreign investment will not necessarily increase the real
productive capacity of capital and lead to an increase in
domestic output.
If the large-scale inflow of foreign investment is just in
pursuit of profits in the securities market or real estate market,
rather than ultimately entering the sphere of real production,
bubble economy will result.
38
A. The Impact on Mainland China’s Economy (continued)
As a consequence, certain preconditions, including (1) accelerating reform
of domestic enterprises with the liberalization of capital account, (2)
enhancing the efficiency of domestic enterprises in utilizing foreign
investment, and (3) promoting the healthy development of domestic
securities market so as to hold the bubble in check effectively, are needed
for the conversion of massive inflow of foreign investment into real
production capacity which will raise domestic output.
Without these preconditions, massive inflow of foreign investment may
cause some trouble.
39
A. The Impact on Mainland China’s Economy (continued)
We will make an analysis of the effect from the other angle
below, namely the effect on financial activities.
Massive inflow of foreign investment will lead to an increase
in domestic foreign exchange reserve, which will, under the
fixed exchange rate regime, result in an increase in the
corresponding issuance of the Renminbi. A large increase in
domestic money supply will cause inflation and affect real
exchange rate.
40
A. The Impact on Mainland China’s Economy (continued)
In our model, the formula for real exchange rate is
q
t

e t P h ,t
P c ,t
(3)
We can see from formula (3) that, with nominal exchange rate, e, held constant
and with foreign price, Ph , held constant, a rise in domestic price level, Pc, will
lead to a fall in the numerical value of real exchange rate, q.
For example, when the exchange rate of the US Dollar vs. the RMB changes
from RMBY8 / US$1 to RMBY7 / US$1, the Renminbi has actually
appreciated. The fall in the numerical value of real exchange rate, q, namely
the real appreciation of the Renminbi, will bring a rise in import volumes [See
equation (22)(38)] and a fall in export volumes[See equation(28)(39)].
41
A. The Impact on Mainland China’s Economy (continued)
The trend of rising imports and falling exports will cause China to
run a current account trade deficit, which will cause a real
devaluation of the Renminbi.
A severe real devaluation of domestic currency may lead to the
massive flight of foreign investment and even to the outbreak of
financial crisis. Consequently, in the course of capital account
liberalization, the Chinese government should adopt a more
flexible exchange rate regime in order to avoid the occurrence of
these problems.
The whole chain-reaction discussed above is shown at Figure 1.
42
Figure 1
Effect of Massive Inflow of Foreign Investment
Foreign investment inflow
Capital goods
Eq.(42)
Output
Eq.(34)
Eq.(29)
Money supply
Real exchange rate Eq.(3)
Wage
Eq. (38)
Imports Eq.(22)(38)
Consumption
Eq.(2)
Welfare
Eq.(1)
Exports
Eq.(28)(39)
Real value of Renminbi
43
A. The Impact on Mainland China’s Economy (continued)
In addition, in the course of capital account
liberalization, there also exist some other issues,
such as persistently deepening financial system
reform, enhancing the competitiveness of domestic
commercial banks, pursuing market-oriented interest
rate, and strengthening financial supervision.
Here in this paper, we do not intend to discuss these
issues in detail.
44
B. The Impact on Hong Kong’s Economy
The liberalization of China’s capital account
and the full convertibility of Renminbi will
undoubtedly have a far-reaching effect on
Hong Kong’s economic development. The
effect can be summarized as follows:
45
B. The Impact on Hong Kong’s Economy (continued)
(1) Direct investment aspect:
Until now, Hong Kong’s direct investment in the mainland has developed to
a certain scale. With the lifting of various restrictions on capital account
transactions and exchange, mainland China will provide the flowing-in
foreign investment with a wider range of investment opportunities and a
better legal and institutional environment, which is conducive to the further
expansion of Hong Kong’s direct investment in the mainland.
At the same time, the mainland will offer looser conditions for capital
outflow, which in turn increase mainland’s direct investment in Hong Kong.
Hence it helps promote Hong Kong’s economic development and benefit
local employment.
46
B. The Impact on Hong Kong’s Economy (continued)
(2) Portfolio investment aspect:
When the mainland relaxes various restrictions on portfolio
investment, there must be development in the listing of foreign-
funded enterprises on the mainland stock market. In addition,
more mainland residents could purchase stocks and other
securities issued out of the territory. This will help Hong Kong’s
firms getting listed in the mainland and enlarge the size of Hong
Kong’s securities market.
47
B. The Impact on Hong Kong’s Economy (continued)
Recently, that Hong Kong firms’ hope to get listed in the
mainland has become a hot issue in Hong Kong.
Chief executive of the Hong Kong Monetary Authority, Joseph
Yam (2001), once stated his views about this issue on the web
page of the Hong Kong Monetary Authority. He came up with
some instructive proposals on how the mainland should
gradually lift restrictions to enable Hong Kong’s firms to get
listed in the mainland.
48
B. The Impact on Hong Kong’s Economy (continued)
He (Joseph Yam) also put forward some quite meaningful
opinions on how to outline the sequence of financial
liberalization.
He holds that, on one hand, rules designed to restrict the free
flow or use of money are to be broken or to be circumvented
so that further steps of liberalization should be taken. On the
other hand, decision-makers should be careful about the pace
of financial liberalization. Only when the attendant risks have
been clearly identified and a prudent risk management
mechanism has been put in place should the relevant steps,
however beneficial, be taken.
49
B. The Impact on Hong Kong’s Economy (continued)
(3) Imports and exports aspect:
With the mainland’s accession to WTO and its continuous
opening of capital account, the scale of imports and exports of
the mainland will be further enlarged. This will offer Hong
Kong more commercial opportunities. Thus Hong Kong’s
role as a bridge in the field of trade will be enhanced.
50
B. The Impact on Hong Kong’s Economy (continued)
(4)
Financial service aspect:
Just like the co-development of Hong Kong and Singapore in the past few
decades as international financial centers; and like the co-functioning of
London and Frankfurt, New York and Chicago, which jointly act as
financial centers; Shanghai and Hong Kong will join their hands together
in playing the role of international financial centers.
With the mainland’s entry into WTO, its continuous opening-up of capital
account and the future full convertibility of the Renminbi, the overall scale
of mainland’s capital inflow and outflow will dramatically be enlarged.
This will not only favor the development of Shanghai as a newly rising
international financial center, but also offer new and very large room for
the further development of Hong Kong as a mature international financial
center, due to the inadequacy of the mere reliance on Shanghai.
51
B. The Impact on Hong Kong’s Economy (continued)
Influenced by the 1997 Asian Turmoil and the recent slowdown
in economic growth in major countries such as the United States,
the world financial market is in a phase of adjustment and
commercial opportunities will thus diminish. These would drive
some Hong Kong-based financial institutions to partly transfer
to Shanghai to seek new commercial opportunities.
Once the world economy regains its momentum, coupled with
the new development of the mainland’s economy, Hong Kong’s
financial industry will achieve new and greater development.
52
B. The Impact on Hong Kong’s Economy (continued)
(5)
New financial derivative instruments aspect:
The rapid globalization and intensified competition in global
financial market are encouraging constant development of
financial innovation. Hong Kong, as a well-grounded
international financial center which bears a specific advantage,
will play an important role in developing new financial
derivative instruments.
53
B. The Impact on Hong Kong’s Economy (continued)
(6)
Interregional links aspect:
Hong Kong is backed by the vast market of the mainland,
especially the very large market of some southern provinces
adjacent to it like Guangdong that are very closely linked to it
in aspects of economy, history, culture and life. These
southern provinces, Guangdong in particular, have achieved
great development since the mainland’s opening-up and
reform, and they are expected to gain further development
with the mainland’s accession to WTO and its opening of
capital account. This will also offer very large room for Hong
Kong’s economic development.
54
B. The Impact on Hong Kong’s Economy (continued)
(7)
Qualified personnel aspect:
With the ever-expanding flow of fund, commodity and
information, qualified personnel flow is also getting enlarged.
In the presence of intensified competition in financial market,
commodity market and service market, qualified personnel
will surely play a more important role.
In order to retain the favorable position and bring it into full
play, Hong Kong should, in the long term, make greater effort
in the cultivation of qualified personnel.
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5.
Conclusion
I. There does not exist a uniform or fixed sequence in
adopting the full convertibility of a currency due to the
differences across countries. Based on the common
practice and sequence taken by most countries in the
world, and in view of the fact that China is a large
developing country, we conclude that a steady and
carefully planned sequence is needed for the full
convertibility of the Renminbi.
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5.
Conclusion (continued)
II. The process of the Renminbi’s full convertibility should be
broken down into three stages in general: The first one is the
adoption of current account liberalization, which was
established by 1996; Second, is the capital account
liberalization which is currently going on; The third is the
adoption of the Renminbi’s full convertibility, which will
take place in the future. For the course of liberalization of
both current account and capital account, each should be
further broken down into two successive steps: First, lifting
restrictions on current account or capital account
transactions; Second, lifting restrictions on current account
or capital account exchange, namely adopting current
account or capital account convertibility.
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5.
Conclusion (continued)
III. Foreign banks are allowed (1) to handle foreign exchange
business towards China’s enterprises in the same year that China
enters WTO; (2) to handle the Renminbi loan business towards
China’s enterprises within two years after China’s entry into
WTO; (3) to handle the Renminbi deposit and loan business
towards individuals residing in China within five years after
China’s entry into WTO. Some people thus utter that these
measures mean the Renminbi will soon become a fully
convertible currency. Our analysis shows that this utterance is
inaccurate.
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5.
Conclusion (continued)
IV. Achieving the Renminbi’s full convertibility will have
an extensive effect on mainland China’s economy. By
using the general equilibrium model, we find that a
series of preconditions are needed for the full
convertibility of Renminbi, including appropriate macroeconomic
policy,
micro-sided
enterprise
reform,
financial system reform, market-oriented interest rate
reform and more flexible exchange rate policy, etc.
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5.
Conclusion (continued)
V. Achieving the Renminbi’s full convertibility and hence the
promotion of mainland China’s economic development will
also have extensive effects on Hong Kong’s economy.
These effects, generally speaking, are conducive to
promoting Hong Kong’s economic development, though it
may also exert certain pressure on the transition of Hong
Kong’s economy, especially on the cultivation of qualified
personnel.
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5.
Conclusion (continued)
VI. With the mainland’s entry into WTO and with its continuous
opening-up of capital account and the future full convertibility of
the Renminbi, the overall scale of capital inflow and outflow of
the mainland will dramatically be enlarged. This will not only
favor the development of Shanghai as a newly rising
international financial center, but also, due to the inadequacy of
the mere reliance on Shanghai, offer new and very large room
for the further development of Hong Kong as a mature
international financial center. The economic recoveries of major
countries and the East Asia region, coupled with the new
development in the mainland’s economy, will bring new and
greater development to Hong Kong’s financial industry.
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Thank you
very much.
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