beyondbrics

Chinese policymakers often allude to the famous quote from Deng Xiaoping, father of Chinese economic reform: “Cross the river by feeling for the stones”. That approach arguably kept China’s feet dry during the global financial crisis and Beijing is not about to abandon it now.

So earlier today, when senior Chinese officials told a conference of top Hong Kong financial officials about Beijing’s plans for further internationalisation of the renminbi and liberalisation of capital markets, the emphasis was on “steady as she goes”.

They did mention a few tweaks to China’s rigid system of capital controls. China is in the “home stretch” of preparations to launch Hong Kong exchange traded funds ETFs) on the Shanghai market to give domestic investors an alternative to local stock and property markets, said Tong Daochi, director general for international affairs at the China Securities Regulatory Commission. He said Hong Kong ETFs are “a very important product, because it’s the first cross-border product under the Qualified Domestic Institutional Investor programme,” which gives Chinese a narrow channel to invest overseas.

James Liu, vice president of the Shanghai Stock Exchange, said cross border Hong Kong ETFs would launch in Shanghai sometime later this year. After Hong Kong ETFs would come ETFs based on the New York, London and Tokyo markets, he said.

Tong noted that China has no shortage of investors, pointing out that there are 150m investment accounts linked to the country’s stock exchanges – a number more than twice the entire population of the UK.

China has a lot of investors, “but casinos in Cambodia have a lot of people too,” said Liu, referring indirectly to the notorious volatility and irrationality of the mainland investor.

China is considering making it easier for small and medium-sized domestic companies to list in Hong Kong, Tong said. And he reiterated that Beijing is paving the way for foreigners to issue Rmb-denominated stocks and bonds in China. Liu said Shanghai will launch its much vaunted international board only after the Hong Kong ETF debut, underlining yet again that foreign listings in Shanghai are hardly on the immediate horizon.

Stone by stone, China will cross the rapids to a more freely traded renminbi. But the river is wide: according to Lawrence Lau, vice chairman of Citic Capital Holdings and economics professor at the Chinese University of Hong Kong, less than 1 per cent of China’s total international trade is being settled in renminbi now following the launch of a trial programme for cross-border trade settlement.

“We’ll continue carrying on the central goverment’s policy, opening up our capital market step by step,” said Tong, feeling for those stones.

With additional reporting by Shirley Chen