The widely anticipated move by mainland authorities to revalue the yuan, viewed as the next step towards the liberalisation of China's currency, is likely to be a gradual process, according to financial experts.
Qu Hongbin, HSBC co-head of Asian economics research, says the mainland's management and readjustment of the yuan was taking a similar route it used prior to the financial crisis. The decision to revert to a basket of currencies, including the US dollar, rather than the dollar alone to set the exchange rate, restores policies similar to those in place before the global downturn.
Qu says this would allow the yuan to respond more naturally to supply and demand forces. 'Since the announcement was made we have seen increased volatility and flexibility, I expect this will set the tone going forward. Greater flexibility will allow more scope for latitude in China's monetary policies and could help the authorities to counter inflation,' Qu says.
He says it is important not to confuse the liberalisation of the currency with the opening up of the mainland market. 'Opening the market will continue to be a measured process of gradually becoming more internationalised and more market driven,' Qu says.
Standard Chartered economist Kelvin Lau Kin-heng says the pace of change in the mainland's financial markets over the past 18 months had been significant. 'We have seen international trade settlement grow from nothing to US$50 billion, RMB bonds expansion, readjustment of the RMB and the window open for Hong Kong to develop more RMB products,' Lau says.
The mainland is serious about internationalising the yuan, but this will involve a process of gradual openness. The government's gradual approach to currency flexibility has exceeded expectations. 'We have seen more volatility and movement than we expected. At the current rate, the RMB would appreciate by an annualised rate of 14 per cent over the next 12 months, but we do not expect Beijing to allow this to happen,' Lau says.