On the road to currency reform
Ever since China's new top leaders were named in November, investors at home and abroad have been watching for pointers to financial reform as China integrates further with the world economy. Until now the leaders had been long on talk of reform but short on specifics, apart from the need to eradicate corruption, waste and extravagance - which are signs of decadence rather than of a rising power.
Last week Beijing unveiled its long-awaited economic priorities, including the clearest guidelines yet for reform of a financial sector burdened by deep-rooted political and economic problems such as regulation and state monopoly.
Many people were pleasantly surprised by the concrete detail. The subject that captured most attention was internationalisation of the yuan. The State Council, chaired by Premier Li Keqiang , said it would unveil an operational plan this year to make the currency fully convertible under the capital account for a free two-way flow of funds.
This implies a clear time frame. People can be forgiven for being sceptical until they see it, since there has been talk but never a clear timetable in the past. The yuan has been convertible on the trading account since 1996. The central bank put full convertibility on the agenda at the same time, with 2000 as a nominal target date, but the Asian financial crisis scuttled it. In 2007 Beijing announced its ambition to internationalise the yuan, but the global financial crisis overtook it.
What sets the latest development apart is that Li would not have promised an operational plan without prior high-level agreement about a timetable and how to implement it. It seems, therefore, that China's top leaders have reached a consensus on pushing forward faster. That would be one of the reasons retiring central bank governor Zhou Xiaochuan was asked to stay on in the job, since he is seen as one of the key architects for internationalisation of the yuan.
A clear plan is welcome. It is a logical move when China's power is rising. But contrary to some predictions, there is a long way to go before the currency is fully convertible because of the risk of capital flight that can only be contained by domestic liberalisation, including breaking the stranglehold of state-owned enterprises. In that regard the State Council's pledge to "steadily reform" interest rates and exchange rates is welcome.
Currency reform will be a difficult balancing act. The new leadership has shown political courage in addressing it.