More Open Chinese Currency Market

Over the past few weeks and during the recent annual session of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), some astonishing decisions were made:

First of all, government officials are still not afraid of a very moderate slowdown. It is rather the contrary: Comments from the top levels of the administration indicate that they are more willing than their predecessors to accept some slowdown in order to be ready for long-term challenges and a more sustainable future.

For this external observer — and all-time friend of China — it is amazing to see the attitude of the Chinese officials changing toward accepting a more open communication culture. First of all, China is driving the liberalization of its fixed interest rates faster than expected. This will make bank deposits much more attractive to the Chinese citizens. One must know that Chinese people are champions in savings. People’s Bank of China Governor Zhou Xiaochuan has not yet announced a timetable. China is also actively promoting the depreciation of the yuan.

A second sensational move is that Chinese officials announced that China will establish five private banks “on a trial basis.” Those banks will be located in Shanghai, Tianjin, Guangdong Province and Zhejiang Province. Ten private enterprises will be involved in preparing the bank setups. At least two private capital providers will cosponsor each bank, according to Shang Fulin, president of the China Banking Regulatory Commission. Shang did not provide a timetable for the banks’ launches, but said that approval will be timely.

But one thing is even more astonishing and will probably provoke a financial earthquake: The Shanghai Futures Exchange will soon introduce China’s first yuan-denominated crude oil futures. In September 2013, China became the world’s biggest net oil importer, surpassing the United States. In the meantime, the U.S. has become a net exporter of oil, thanks to the very controversial fracking and other activities. For this reason, the U.S. is less dependent on foreign oil. In late February, the China Securities Regulatory Commission stated “that a policy framework for the new oil futures has been pinned down, and it will guide the Shanghai Futures Exchange in its preparations.”

As most Textile World Asia readers are aware, this liberalization of monetary policy, depreciation of the yuan and the introduction of yuan-denominated oil futures will have some impact on the U.S. dollar. Up to now, for example, most of the global oil contracts have been settled in U.S. dollars.

We are living in an interesting time.

April/May/June 2014