Calls to hasten yuan convertibility
There are increasing calls for Beijing to accelerate the yuan's convertibility under the capital account, which could hasten its transformation into a world currency.
Mainland policymakers have long defended restrictions over cross-border investments by citing the need to shelter the nation's financial system from fluctuations in the global economy. However, many economists and officials are now trying to convince Beijing that the benefit of lifting the restrictions is increasingly outweighing the costs.
Xie Ping, executive vice-president of China Investment Corp, which is the manager of the nation's US$300 billion sovereign fund, told a seminar last month that he hoped the government could complete the much-needed reform by 2013.
'We have met the prerequisites: a stable macroeconomic environment, a sound financial regulatory system, sufficient foreign reserves and prudent and healthy financial institutions,' Xie said, adding mainland policymakers should accept the 'political risk'.
The mainland's foreign exchange reserves increased by US$138 billion in the first quarter of the year, the State Administration of Foreign Exchange (SAFE) said yesterday. The reserves swelled to more than US$3 trillion at the end of March, adding to pressure to invest more aggressively abroad.
Xie said opening capital accounts could give the most effective support to policies encouraging companies and individuals investing overseas, and lay the foundation for the yuan to become a world currency. A capital account includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts and currencies.
Beijing has been pursuing greater influence in the global economic and financial arena since the global financial crisis by encouraging the use of the yuan for global trade settlements, welcoming neighbouring countries who are building yuan-denominated positions in reserves and enlarging its stake in the International Monetary Fund. Regarding concerns about hot money, Xie said Hong Kong's experience in managing speculative fund flows should provide a good example in how to deal with the issue.
China may suffer from more severe imbalances and a slowdown of necessary reforms if the country maintains broad capital account controls, Li Chao, deputy head of SAFE, wrote in the latest issue of China Forex Magazine. Li wrote that China needed to be more proactive while pushing forward the yuan's convertibility.
Lu Ting, an economist with Bank of America-Merrill Lynch, said a new round of debate had begun on capital control restrictions.
'The lifting of those restrictions will continue to be a slow process, though the ambition to internationalise the yuan might accelerate this process a bit,' Lu said.
In the 12th five-year plan, covering the years 2011 to 2015, Beijing said it would make the yuan 'gradually' convertible under capital accounts, the same wording used in the previous five-year plan.
Some economists have noted that as interest rates and foreign exchange rates were still not fully liberalised on the mainland, there was still a long way to go before full convertibility of the yuan can be achieved.
In 1993, Beijing first announced its intention to make the yuan convertible gradually. Current accounts were opened up in 1996.
It usually takes between 15 and 20 years for a country to open up its capital accounts after current accounts are liberalised.
Holding the money
China's foreign exchange reserves (US$b)
March 2011
US$3.045tr
Year-on-year increase in March
24.4%
Sources: Bloomberg, Xinhua
