The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Export woes may spur yuan rethink
Gains in the currency have made Chinese goods uncompetitive abroad at a time when Beijing counts on trade to ease the pain from reforms
Beijing may be about to begin a rethink of its currency policy in an effort to give the country's struggling exporters the flexibility they need to cope with a raft of painful economic reforms.
The steady government-approved appreciation of the yuan has driven the currency to within a whisker of six to the US dollar, a level that broad swathes of industry complain makes Chinese products uncompetitive abroad.
That is bad news for Beijing policymakers, who are just beginning to see signs of economic stability returning in recent data after growth dropped to a three-year low in the second quarter.
Economists like Bank of America Merrill Lynch's Lu Ting say a further rise against the dollar in the yuan - the level of which is based on a central parity rate set each day by the central bank - could undermine export competitiveness.
The problem for the government is that it needs trade to strengthen to take some of the strain off reforms that are required to rebalance the economy and reduce a growing dependency on the investment-led spending that now underpins growth.
A big part of the currency problem is that much of the yuan's appreciation this year has been tied to a rebound in the dollar from multi-year lows.
Zhang Monan, deputy chief of the economic forecasting department of the State Information Centre, a unit run by the National Development and Reform Commission, said that under the existing exchange rate system, the yuan had moved in tandem with the greenback while being unable to reflect changes in the values of the currencies of the mainland's other major trading partners.
So the information centre had urged the leadership to overhaul the mechanism to set the yuan's value with reference to a basket of currencies, Zhang told the South China Morning Post.
"The yuan may be overvalued if it rises further to breach six per dollar. China's industrial structure has yet to be upgraded, and its productivity can hardly support a significant appreciation of the yuan," Zhang said.
"China's economic development needs a stable currency. Over-appreciation would inflict dramatic blows to exporters, particularly small and medium-sized enterprises. Industrial competitiveness would diminish."
Analysts are concerned that yuan appreciation does not match economic fundamentals in the world's second-largest economy, where growth has slowed from a peak of 14.2 per cent in 2007 to 7.8 per cent in the third quarter of this year.
It does not bode well for exports, which fell 0.3 per cent year on year in September and remain hostage to fickle demand in a sluggish global economy.
UBS Securities research concludes the mainland has been "losing steam, or even losing some ground", in its two biggest trade markets - the European Union and the United States.
In the long run, though, analysts say the mainland's export competitiveness cannot just rely on the value of the yuan. Beijing must stimulate domestic consumption and move up the industrial value chain to maintain growth momentum.
The upcoming meeting of the Communist Party's top leaders this weekend - just as key data on trade, inflation, industrial production and fixed-asset investment is due to be released - is expected to lay out a roadmap of reforms, with an overhaul of the financial sector widely anticipated to be a core focus.
Stephen Roach, a professor at Yale University and former chairman of Morgan Stanley Asia, believes reforms should leave the mainland committed to "an increasingly flexible and ultimately convertible [yuan]".