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Will China’s Yan Have Convertibility by 2015



Once seen as unthinkable, talk of full convertibility for the yuan is increasing with one analyst saying it’s only a matter of time.


CHIANGRAI TIMES – Davide Cucino, President of the European Union Chamber of Commerce in China (EUCCC), said Chinese officials had told EU business executives the currency would achieve full convertibility by 2015. When contacted by the EUCCC said they had previously heard about convertibility from their member companies.

But speaking on Thursday in London, China`s central bank chief, Zhou Xiaochuan, said that there was no time table for the full convertibility of the yuan, though it plans to make the yuan convertible on the capital account eventually.

On July 18, Dow Jones quoted a PBOC official, Ge Huayong as saying China should achieve “basic” convertibility within 5 years.

Analysts have become more confident of the possibility as China has pushed to internationalize its currency via offshore trading. But shifting to full convertibility would be a significant move. The yuan is convertible on the current account, but China strictly controls convertibility for investments, or on the capital account.

Still, RBS`s Oakley believes China is progressing at a quicker pace than a year ago on making its currency freely tradable.

But not everyone is convinced that China`s recent moves point towards full yuan convertibility.

“I look at it as China going ahead and internationalizing its currency without fully opening up its capital account,”  Robert Minikin, Senior FX Strategist at Standard Chartered, told CNBC.

Minikin said he was skeptical China could achieve such a big shift by 2015. “I think it will take 10-20 years for the currency to be largely convertible.”

He, however, believes the yuan, which has risen about 6.4% over the past one year and touched a 17-year high of 6.3705 versus the dollar on August 30, will extend its appreciation over the medium term. “It should rise about 4 percent year on year for the next 5 years.”

Beijing’s push to internationalize the yuan is well-timed and it should promote the currency in neighboring countries and emerging markets, a think tank under China’s cabinet said in a new book.

Co-authored by a team of researchers at the Development Research Center, the book applauded Beijing’s plans to turn the yuan into a widely traded currency, but said it should first take the renminbi regional, before taking it global. The yuan is also known as the renminbi.

“For a long period of time to come, the yuan is unlikely to rival the dollar or even challenge the euro’s position,” argued the economists, including Chen Daofu and Zhang Chenghui.

“So a realistic approach would be to go regional before going global,” they said.

The stride towards an international yuan may be slow, but it is definitely essential as China is still a small player in global financial markets, and that is at odds with its status as a world economic and political power, the book said.

The internationalization, or coming out party, of the yuan is the poster child of China’s running campaign to slowly unlatch capital controls and throw its financial markets open to the rest of the world.

As one of its ultimate goals, Beijing wants to have a convertible currency, or one that trades with few restrictions.

To raise the yuan’s usage overseas, it has taken a string of measures including letting exporters across China settle trade in yuan, developing Hong Kong’s offshore yuan market, and sealing currency swap deals with other central banks.

The book said China should broaden the yuan’s use in three directions: south towards Southeast Asia, Africa and Latin America; west towards members of the Shanghai Cooperation Organisation in central Asia, and north towards North Korea, Mongolia and Russia.

Beijing should also boost the yuan’s use in trade and try to disburse more loans and financial aid in yuan, they added.

The offshore yuan market in Hong Kong would play a central role in Beijing’s management of capital controls by defending the yuan’s exchange rate and giving investors incentives to hold the currency, said the book entitled “The Regionalisation of RMB”.

All said, Beijing’s dreams for the yuan comes with risks.

In interviews with regulators and bankers in Hong Kong and Singapore, the researchers were told by banks that many investors chase the yuan in hope of windfall currency gains.

Hong Kong bankers also said investors would likely ignore, when possible, Beijing’s preferences on how the yuan should be used in trade, investment and state reserves.

“Once the yuan leaves China’s borders, its use will go beyond the Chinese government’s control,” the book said, citing a summary of talks with Hong Kong bankers.

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