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Sovereign bond sales and currency futures should be the next steps for the Pudong New Area in Shanghai to bolster trade in the offshore yuan by drawing on a pool of existing international and domestic market players, policy advisors told MNI.
A good start would be the Ministry of Finance issuing Chinese government bonds (CGBs) in Shanghai to deepen traded volume and scale, said Ding Jianping, a member of the academic committee at the International Monetary Institute and vice president of Shanghai Institute of International Finance Center.
"The Ministry of Finance can form an institutional arrangement in the Shanghai offshore market to sell yuan-denominated government bonds, similar to the annual scale issued in Hong Kong," said Ding.
China released guidelines last month to develop the Pudong New Area into a pioneer of socialist modernisation, including to build an offshore financial system that matches Shanghai's position as a world financial centre.
And there will be support for early and pilot implementation of the free use of the yuan in Shanghai, according to July remarks from Wang Xin, director of research at the People's Bank of China.
Ding said the Ministry of Finance can draw on sovereign bond sales experience in Hong Kong to the offshore bond market, which would lower yuan financing costs in Shanghai and avoid "dollarization".
Foreign banks holding yuan in the offshore market in Shanghai would be encouraged to carry out lending, foreign exchange, or debt purchases to increase the proportion of yuan on balance sheets, said Ding.
Funds connected to "Belt and Road" projects would also boost yuan loans overseas, Ding added.
A Shanghai offshore yuan market would also spur movement on further opening China's capital account as trade picks up, according to Ding.
China has moved to allow more cross-border capital flows, including removing investment quota limitations for Qualified Foreign Institutional Investors (QFII) and RMB Qualified Foreign Institutional Investors (RQFII) in 2019, as well as considering widening outbound investment channels to bonds and wealth management products in Hong Kong.
Regulations hold that for current and direct investment accounts, cross-border fund settlements must be based on real trading backgrounds. But under the capital account, many potential investors lack documents like export tax rebates or direct investment approvals to prove the "authenticity" of their transactions.
"A relaxation (of those rules) is a key to further develop the offshore market," said Ding.
He said Shanghai could rely on third-party institutions to evaluate asset and liability profiles to replace the "authenticity" review, so to help start yuan currency futures trade in Shanghai.
VOLUMES THE KEY
Real-time transactions and solid volumes are needed to make such a market takeoff, said Zhao Xijun, deputy dean of the School of Finance at Renmin University.
"That would include comprehensive price information into the broader domestic financial market," said Zhao.
Hong Kong facilitates 75% of all offshore yuan payments as of August and commands CNY821.2 billion of offshore yuan deposits by end-June.
But Zhao said the idea is not to replace Hong Kong's roles in finance to the mainland, and instead experiment with offshore business in Shanghai to involve more domestic market participants to prepare for further opening of the domestic market.
Both advisors said Hong Kong and Shanghai would then reinforce and deepen the markets with the features of each city's financial status seen as complimentary.
Zhao said that current investment channels such as StockConnect and BondConnect already provide a base of cross-border investors to trade offshore yuan. The next step is using yuan holdings to invest in the domestic market.