China is set to establish an offshore yuan market as its currency's influence rises and its economy continues to bloom.
Though policymakers have not yet decided on the location, Tianjin is reportedly the top choice. But given its advanced financial infrastructure, Shanghai could be the ultimate winner.
Hong Kong, which many market-watchers speculated on, may not be considered at all.
The People's Bank of China (PBOC) said on Thursday that it had already set up a special exchange rate policy department and will develop "an offshore yuan market in keeping with the process of the currency's internationalization".
The department will focus on foreign exchange policymaking and the State Administration of Foreign Exchange will implement the policies, Ma Ming, senior economist with the Beijing Institute of Technology, said.
The Chinese currency, though still not fully convertible, will be traded among foreign companies and institutions as well as domestic players, who will be guaranteed tax benefits.
The move shows the yuan has become more influential, analysts said. "It is set to become a global currency," Ma said. "And setting up such a market will be the first step toward that end."
The offshore yuan market could be set up in a bonded area in Tianjin, Caijing magazine has reported.
Talking to China Daily, a source close to the policymaking process confirmed that Tianjin was a possible choice and the application process for the market was underway.
But policymakers could suspend the process, too, because the yuan's rise has slowed down recently, the source said.
Hong Kong, considered a favorable location because it already has an informal offshore yuan market, may not be chosen because it would be difficult for the mainland to properly manage the establishment there.
Although Hong Kong is China's special administrative region, relevant laws state the PBOC, the country' central bank, cannot be involved in its economic affairs.
That is why Shanghai is one of the two choices, said Zhao Xijun, professor of finance at Renmin University of China.
The PBOC has set up an office in the city to manage the financial hub's market.
China's inter-bank and foreign exchange trading markets both are in Shanghai, giving it a competitive edge over Tianjin, Zhao said.
"Its financial infrastructure is stronger too, offering a better base for the market."
The country's economy remains resilient and is likely to retain its growth momentum in the second half of the year despite the weakening global demand and natural disasters at home, the PBOC said yesterday.
Inflation, however, still needs to be checked and the inflationary risk should not be underestimated, it said.
(China Daily August 16, 2008)