Banking

J.P. Morgan Chase & Co. and Morgan Stanley have both won approval for securities joint ventures in mainland China, the first U.S. firms to gain such access in six years.

The new ventures will allow the two Wall Street banks to underwrite stocks and bonds in mainland China. Like other international investment banks, both firms can already underwrite deals for Chinese companies in Hong Kong, New York and other markets.

The approvals, announced by China's securities regulator, are the first for any U.S. banks in China since Goldman Sachs Group Inc. got the go-ahead to set up a China venture in late 2004. Since then, several European banks have established partnerships, including UBS AG, Deutsche Bank AG and Credit Suisse Group.

The announcements also provide a buzz of positive news on U.S.-China business relations ahead of a trip by Chinese President Hu Jintao to Washington later this month. Such high-level political summits often coincide with favorable bilateral trade deals.

Wall Street banks have been lobbying hard to do deals in the world's fastest-growing major economy as more companies go public and China's capital markets expand.

"China has the world's second-biggest stock market, where every investment bank has to find its niche," said Zili Shao, chairman and chief executive of China for J.P. Morgan.

Six months after China pledged to increase the flexibility of the yuan exchange rate versus the dollar, there are fresh signs that it is gradually moving closer to a more international role for its currency.

On Thursday, the Hong Kong Monetary Authority said yuan deposits in the city surged to 280 billion yuan ($42.12 billion) at the end of November from 217 billion yuan in the previous month, a sign of strong demand for the Chinese currency in Hong Kong and of a convergence between the territory's open financial system and the mainland economy. HKMA Chief Executive Norman Chan said the yuan market is expected to "develop progressively" in 2011.

Meanwhile, Hong Kong banks introduced a technical change that will make more use of electronic settlement in financial transactions that use the yuan. The primary purpose of the yuan-deposit program, which was introduced earlier this year, is to facilitate trade. But it is also seen as an important early step toward the full internationalization of yuan, which would eventually involve making it convertible for capital transactions.

China raised interest rates for the second time in slightly over two months, signaling the authorities' resolve to combat rising inflation.

Beijing's latest move also suggests the world's second-largest economy may be entering a relatively formal monetary tightening cycle and that policy-makers may have been convinced that the weapons used so far, such as credit rationing and artificial price controls, have failed to cool politically sensitive consumer price pressures.

The People's Bank of China said Saturday that effective Sunday, it will raise the one-year yuan lending rate by a quarter of a percentage point to 5.81% from 5.56%, and the one-year yuan deposit rate to 2.75% from 2.50%. The move comes after the central bank raised on Oct. 19 the benchmark lending and deposit rates also by one quarter of a percentage point each, the first rate increase in nearly three years.

Saturday's announcement shows that the PBOC will likely raise interest rates more often next year to curb overly ample liquidity and rising inflation, said Brian Jackson, an economist at the Royal Bank of Canada.

China's currency, pent up inside the country's borders for decades, is emerging as a hot property in global foreign-exchange markets, just months after Beijing allowed the yuan to be bought and sold outside the mainland for the first time.

Daily trading in the yuan has grown from zero to $400 million in the past few months, as the currency of the world's second-biggest economy begins to flow around the globe. Global trading in yuan allows businesses to buy and sell the currency to finance trade, investment and borrowing. It's an important step for the yuan to play a role in global financial markets.

The value of the yuan remains tightly controlled by China, so its value won't rise and fall to the same extent as the dollar or euro, in spite of the new trading. Even so, foreign-exchange traders who are embracing the currency see demand for yuan rising sharply. Bankers in New York, London and Tokyo are rushing to set up new trading systems and back offices to trade in yuan.

"This is the beginning of a new era," said Norman Chan, head of Hong Kong's central bank. "This is a step moving to full convertibility of the yuan, and is a major change of the international financial landscape."