ZHU Rongji's agenda might be getting a little crowded, but he will have to make time for some changes to the currency system, as well as implementing banking reforms. For, while placating the conservative critics of the market system, he has to show China's major trading partners that the country's currency system is being operated fairly and not as a tool of the export drive. Above all, he must convince Washington that China's huge trading surplus with the US is not partly the result of an artificial depreciation of the renminbi. Having been battered by the once cheap currencies of Japan, Korea and Taiwan, when they were just fledgling economies, the US is understandably nervous about losing yet more of its domestic market to imports which are being effectively subsidised by foreign exchange policies. The US Treasury has attacked China's foreign exchange system as a complicated barrier to imports. Last year, the US had an US$l8 billion deficit with China, although there is evidence that the massive level of imports has sent the balance swinging in the American direction. It had a surplus of $1.7 billion in April. What China needs to do now - and for many more reasons than just placating suspicious Americans - is to reform its whole currency system, with the ultimate goal of total convertibility. The major changes required will have to lock in with the monetary reforms. Indeed, one will be impossible without the other if China is not to limp along indefinitely with a two-tier money system. How quickly it will be able to reach the more distant target of convertibility, even with the incentive of complying fully with GATT recommendations, is unclear. The recent freeing of rates in the swap centres, where foreign-financed enterprises trade foreign currency, was seen by many as the first step on the road to convertibility. UK stockbrokers Smith New Court, fresh from Beijing, suspect that the final goal will be reached later rather than sooner. ''There are many obstacles to immediate implementation. Gradual, piecemeal currency reforms will continue: the objective probably lies some years away,'' conclude its analysts. The most obvious barrier to an early move to full convertibility is that bank tellers would be killed in the rush of locals switching out of their renminbi savings and into hard foreign currencies. The rush into Hongkong dollars, gold and US dollars already has shown how keen mainland Chinese are to break the rules to protect their savings. Making it easy now, would just open a sluice-gate on a brimming reservoir. But if the country is to become a member of the international financial community, and properly develop its own financial markets, convertibility is essential. What the central bank will have to engineer first is a shift from the present two-tier system, with an official rate for the renminbi, and a radically different swap rate. In fact, it is a three-tier system, as there is also a thriving black market, which cannot be measured, but provides one more difficulty for the central bank to contend with as it tries to make sense of its currency markets. Even the black market has mushroomed as the renminbi has become one of the loneliest currencies in the world. Once the preserve of street-corner, fast-change artists, it is now servicing the corporate sector, where businessmen who desperately need foreign exchange to meet their import bills are more than ready to pay over the odds to secure foreign exchange. Technically there should be no problem to merging the official rate, currently 5.75 to the US dollar, and the swap rate, which was trading at 10.70 to the US dollar last night in Shenzhen. The impediments are purely political. The official rate would have to be devalued to reflect market forces which drive the swap rate - and this would be one more admission that the economy is out of control. Internationally, the move could spark yet more criticism of China's exchange-rate policy, leading to more charges of currency manipulation. While the swap market remains in place it too will need some revision if it is to offer a more logical exchange-rate mechanism. The first logical reform would be to link the 100 or so centres based in the special economic zones and provincial capitals. This would eliminate the often wide differences in rates. If arbitrage were not illegal, currency dealers could make a fortune playing the different rates. It would mean putting the money in a suitcase and flying between centres - there are none of the electronic links which wire most of the world's currency markets, and act as balance pipes for rates. When the official rate finally merges with the swap rate it should be done in one swift, and preferably surprise, move according to Smith New Court. This could happen this year or early next year, and would follow a strengthening of the swap rate as official policies to pull the economy back under control, and a tightening of currency policy, begin to bite. There is no doubt that Beijing is aware of the need to put its currency and foreign exchange markets in order. When the renminbi slumped to 10 to the US dollar this year, there were immediate fears of the effect on inflation, and the People's Bank of China reacted by trying to reassure the market that all was well. It failed, and tried to hold the rate at between 8.14 and 8.21 throughout February, March and April - effectively closing the market. Then followed the decision to float. Now the lesson of the power of market forces will have to be more widely applied.