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Moves towards yuan convertibility begin to pick up pace

Ed Zhang

Look out, dollar. Watch it, yen. The yuan is going global.

The 'internationalisation' of China's currency is expected to be a highlight of Premier Wen Jiabao's speech for China's 12th five-year plan, during the nation's annual parliamentary session in Beijing next month.

The groundwork for the acceleration of the currency's emergence on the world stage was laid two months ago when the central bank - the People's Bank of China - stated that the nation 'has good reason to expand its opening-up of capital accounts in the mid-term'.

The opaque language was interpreted by currency managers as a sign the bank was looking at making the yuan internationally convertible. And though 'mid-term' wasn't clearly defined it is commonly used by mainland economic planners to refer to a five-year period.

In short, the central bank seemed to be setting its sights on full convertibility of the yuan by the end of the coming five-year plan, or at the end of 2015.

The intense anticipation in the market means the internationalisation of the yuan will be one of the biggest global trends to watch this year, according to Nariman Behravesh, chief economist from HIS Global Insight.

Speaking at the World Economic Forum in Davos last month, he warned, however, that it would take 'some years' for a freely convertible yuan to be traded on par with the likes of the US dollar, the euro or the yen.

Rather than a big bang, currency reform is likely to be incremental and gradual. But the subtle change in language suggests the process may unfold in accelerated fashion.

Until the second half of last year mainland officials preferred to use the term 'regionalisation' rather than 'internationalisation' when discussing the yuan's future status, said Jing Ulrich, JP Morgan's chairman of China equities and commodities.

Restrictions on the use of the yuan to settle foreign trade deals were lifted last June. A month later, the central bank issued a memorandum of co-operation with the Hong Kong Monetary Authority, allowing companies to set up commercial yuan business in the city and open yuan accounts and trade the currency in Hong Kong without limit.

The changes strengthened Hong Kong's position as China's offshore yuan centre, Ulrich said.

Now a new chapter beckons for Hong Kong's financial industry as it leverages its connection with mainland China and the global market; its rule of law; and its rich talent pool, said Robert Subbaraman, chief Asia economist of Nomura. By the end of last November, yuan-denominated trade settlements in Hong Kong had reached 385 billion yuan (HK$456.32 billion), and Qu Hongbin, chief economist for China at HSBC, predicted that by 2016 one third of China's cross-border trade would be settled in yuan.

Hong Kong's yuan deposit base, currently at around 300 billion yuan, would reach more than 2 trillion yuan in 2013, according to a projection by Deutsche Bank economist Ma Jun. As mainland banks continue branching out in North America and western Europe, yuan-denominated security and investment products are also going to become more diversified and popular, he added.

The first yuan-denominated bonds were issued in Hong Kong in the second half of 2010 and issues now total 30 billion yuan. Ronald Wan, the investment executive of China Merchants Securities, predicted that figure could rise to between 45 and 50 billion yuan by the end of this year.

The Stock Exchange of Hong Kong is meanwhile preparing for the issue of yuan-denominated shares. Expectations in the mainland financial service sector are that the first yuan-denominated shares will be issued in the middle of this year.

And the next thing to come, financial service executives say, will be an increase in yuan-denominated funds.

'Once yuan stocks are issued, yuan funds will have to follow in due course,' said a senior manager of CICC, a Beijing-based brokerage with international operations.

Ann Wyman, Nomura's London-based emerging markets specialist, said her clients in the Middle East - especially managers of sovereign funds - are eagerly anticipating the issue of yuan-denominated low-risk assets to offer alternatives to US treasury bills.

Many have already set up beachheads in Hong Kong, she added, waiting for investments.

Yuan internationalisation was interrupted by the global crisis in 2008, said He Jun, senior economist of Beijing-based Anbound, a non-governmental consulting service.

He said, however, that circumstances now favoured an acceleration of that process.

The big bang theory

The signs are building that the central bank is setting its sights on full convertibility of the yuan by: 2015