BOC chairman calls for fully convertible yuan

China needs to make the yuan fully convertible gradually to facilitate the currency's internationalisation, the head of the largest foreign-exchange lender on the mainland wrote in state media yesterday.

Xiao Gang, chairman of the Bank of China, called for a 'gradual liberalisation of the capital account' and the deepening of its capital market reform in a commentary in the China Daily. 'The non-convertibility of the yuan is a major hurdle for China to grow into a real financial power,' he said.

China has been pursuing greater influence in the global economic and financial arena since the financial crisis by encouraging the use of the local currency for global trade settlements, welcoming neighbours that build yuan-denominated positions in reserves and enlarging its stake in the International Monetary Fund.

However, Beijing is not expected to make any significant advance in making the yuan fully convertible in the near future as the capital inflows this would bring could exacerbate inflation - the top concern for policymakers, economists say.

In an international seminar last month, Zhou Xiaochuan, governor of the People's Bank of China, said the country would make the yuan convertible on capital accounts in the next few years in a gradual manner.

In 1993, Beijing first announced its intention to make the yuan convertible gradually. Current accounts were opened up in 1996. It usually takes 15 to 20 years for a country to open up its capital accounts after current accounts are liberalised.

However, the prerequisites for such an opening up - the liberalisation of interest rates and foreign exchange rates - are still not in place, which means there is still a long way to go before full convertibility of the yuan can be achieved.

'China must stick to the direction of opening capital accounts. But the premises are not satisfied yet,' said Xia Bin, a central bank adviser.

Despite progress, interest rates on the mainland still work under an administered regime and foreign exchange rates move in a 'managed floating rate system', as Beijing relies on these tools to control the economy.

While inflation climbed to a 25-month high of 4.4 per cent in October, policymakers have turned their attention to reining it in by increasing interest rates, slowing yuan appreciation and monitoring capital inflows closely.

In an attempt to curb capital inflows, Beijing shelved a pilot scheme under which Hong Kong units of mainland fund houses and brokerages were to be allowed to issue yuan-denominated A-share investment funds, the Sing Tao daily reported last week.

BOC's Xiao said: 'The mini-QFII programme could create channels for overseas institutional investors to participate in the mainland's capital market.'

Such a scheme could boost China's financial power in the international banking system and capital markets, he said.