However, a number of observers, including the IMF, now believe that there is scope for more flexibility. But, while most observers regard full convertibility as a desirable long-term goal, few believe that any significant moves will be made in that direction in the near term. This means that, even if the renminbi were to be given more flexibility, it would probably still be subject to the existing exchange rate controls. The immediate consideration for policymakers on the mainland and markets is whether, with greater flexibility, the renminbi would go up or down. China’s persistent current account surpluses suggest that it should appreciate. But the market does not seem to feel this way. The non-deliverable forward exchange rate for the purchase of US dollars is continuously at a significant premium. The difference in views may have two explanations. One is the large amount of negative errors and omissions in the balance of payments, which many presume to indicate unidentified capital outflows. The second is the concern that many have that WTO accession will precipitate, at least initially, a surge in imports that is greater than the surge in exports. Why, then, should flexibility be a matter for consideration? There could be a number of advantages from the perspective of the mainland. For example, allowing more interaction of supply and demand of foreign exchange for current account transactions may serve as a kind of market smoothing mechanism, especially as the short-term volatility of trade flows may increase with the WTO accession.
There is therefore a strong need for China’s banks to gear up and gird themselves for the challenges that will be posed by their sophisticated foreign competitors. For foreign banks, the opportunities brought by financial liberalisation on the mainland, in the context of WTO, are immense. In two years’ time, foreign banks will be able to conduct RMB business with Chinese enterprises in Shanghai, Shenzhen, Tianjin and Dalian. Within five years, they will be able to deal with all Chinese enterprises without any geographical restriction. The obvious advantages for Hong Kong’s banks in this process are the same advantages that have taken Hong Kong’s other industries into the mainland. Hong Kong’s banks were among the first to open branches on the mainland, especially in the southern cities: they know China well, speak the language, have extensive branch networks, and maintain strong relationships, some of which have grown up over more than a generation. There are niches in which Hong Kong’s banks should maintain and extend their competitive advantage. For example, they should be able to continue to derive substantial business from the extensive involvement of Hong Kong companies in the manufacturing and retail sectors in China, in the form of private or joint venture enterprises. Given also that about 40% of the mainland’s trade is routed through Hong Kong, Hong Kong’s banks will have an unrivalled advantage over other banks in capturing the increased demand for trade and related financing services.