Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber

[REO 54]

Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino said.

“We were told by those officials by 2015,” Cucino told reporters in Beijing yesterday, declining to identify the government departments involved. People’s Bank of China Governor Zhou Xiaochuan said that while there is no timetable for convertibility, the offshore yuan market is “developing faster than what we had imagined.”

A freely traded currency would mark one of the biggest policy shifts since China’s leaders embraced private enterprise three decades ago. Such a timeline would help China deflect criticism from U.S. and European lawmakers that the world’s second-biggest economy is gaining an unfair advantage in global trade by artificially keeping the yuan undervalued. It would be a year faster than the schedule expected by 57 percent of 1,263 global investors in a Bloomberg survey published in May.

“Making the yuan fully convertible will lead to foreign inflows into China and a stronger yuan,” said Sacha Tihanyi, a Hong Kong-based strategist at Scotia Capital. “Making the yuan fully convertible is also the key step in pushing it as a reserve currency and enhancing its use in global trade.”

The yuan advanced 0.16 percent to 6.3840 per dollar as of 4:30 p.m. in Shanghai. The currency gained 6.4 percent in the past year and touched a 17-year high of 6.3705 on Aug. 30. Its 0.9 percent advance in August was the biggest in 2011.

Acceleration Tolerated
The latest timeframe would be more aggressive than China’s 12th five-year plan through 2015, released in March, which said the nation was aiming at “gradually realizing the renminbi’s convertibility under the capital account.” China “has no defined timetable for the yuan to be fully convertible,” Zhou said. “It will be a gradual process.” Zhou is in London for an official visit with Chinese Vice Premier Wang Qishan.

“This does sound a bit too early,” said Stephen Green, head of Greater China research for Standard Chartered Plc in Hong Kong. “Even Taiwan and South Korea don’t have full convertibility yet. And if you look at the volatility in global markets right now that looks set to continue for the next few years, this target seems unlikely.”

Currency Basket
The People’s Bank of China said on Aug. 1 it will manage the yuan more actively against a basket of currencies, instead of just the dollar, and allow market forces to play a greater role. The central bank fixes a reference rate for the yuan and limits daily gains or losses to 0.5 percent from that level. The country also limits conversion for investment purposes, and has amassed record foreign-exchange reserves of $3.2 trillion by selling yuan to curb its appreciation.

U.S. Vice President Joe Biden told his counterpart Xi Jinping on Aug. 18 during his state visit that China must address its undervalued exchange rate and remove import barriers to spur trade and investment, administration officials said.

China has started a program to promote use of the currency in global trade. The government issued draft guidelines in August for foreign direct investment in the country using yuan raised offshore and plans to let qualified fund managers invest such funds in China’s stocks and bonds. A similar program already allows licensed companies to convert a quota of foreign exchange into renminbi for investment in Chinese markets.

Barclays Capital wrote in a Sept. 5 note that China will likely achieve basic convertibility of the capital account over the next five years, although restrictions on the amount of money that fund managers can move across the border may remain.

Wang is due to meet with U.K. Chancellor of the Exchequer George Osborne in Britain today. Wang will support efforts by U.K. banks to establish a yuan offshore trading center in London, the Financial Times reported yesterday, citing unidentified British officials.

“The City of London has expressed its interest to help develop yuan’s offshore business,” Zhou said. “We are very encouraged.”

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

[phideaux]

Unless the Yuan is "convertible" into gold or silver or oil or rice or bamboo or whatever, it's just another phony phiat paper promise.

[REO 54]

It's like they want get their foot in the door with their paper sooner,and then maybe then back it with PM's or some other substantial commodity?

[917601]

If you recall James Sinclair visited China by invitation a few years ago.Shortly afterwards, China's massive gold accumulation campaign was unveiled (when gold hit $1000 oz).They have opened gold ownership to their masses in preparation for a gold backed currency-and rest assured they will not allow gold to fall below that mark.China's stock market,the Hang Seng has left many broke, busted and disgusted. The most interesting news (leaked by wikileaks, the DOS Bejing transcripts) is they are aware of the attempts by the western world to manipulate the price of gold,and of the US's intention to create a gold ratio backed currency.Sinclair was not invited to China to eat dumplings and drink green tea. Put it all together.They will take advantage of every beat down in the PM market to accumulate.Do the same, China is.

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China Global Yuan Push Faces Challenges, Adviser’s Report Says.......



China’s efforts to make the yuan a global currency may be hampered by the lack of an independent monetary policy, fragile domestic financial markets and an “unbalanced” economy, a report edited by an adviser to the nation’s central bank warned.

“In the process of yuan internationalization, it will be hard to gain the confidence of the international community in the value of the yuan if monetary policy lacks sufficient independence,” according to the report from the International Monetary Institute of Renmin University in Beijing. Chen Yulu, the editor-in-chief of the report, is an academic adviser to the People’s Bank of China and president of the university.

China has been promoting wider use of the yuan in international investment and trade settlement to reduce the U.S. dollar’s global dominance and curb its own reliance on the currency of the world’s biggest economy. China controls the value of the yuan and restricts flows of capital in and out of the country for investment purposes, limits the U.S. says must be lifted before the currency can be part of the International Monetary Fund’s currency basket.

While Europe’s debt crisis will dominate discussions when leaders of the Group of 20 nations meet in Mexico on June 18-19, Germany plans to call attention to a number of issues including the yuan exchange rate, two government officials said in Berlin on June 12.

Artificially Weak
The yuan jumped the most in eight weeks on June 15 as the central bank strengthened its reference rate, helping fend off criticism of China’s currency policy in the run-up to the G-20 meeting. The yuan, which rose 4.7 percent against the U.S. dollar last year, has dropped 1.1 percent this year. The U.S. contends China is keeping its currency artificially weak to boost exports.

China’s central bank isn’t independent, with financial decisions such as changes in the exchange rate and interest rates made by leaders of the ruling Communist Party.

In its first formal evaluation of China’s financial system published in November, the IMF warned the nation is confronting a “steady buildup of financial sector vulnerabilities” and needs to overhaul its state-dominated banking system. The government needs to change the way interest rates are set and allow the yuan to trade more freely to help contain risks in the financial system, it said.

The nation’s “excessively rigid” exchange-rate system “casts doubt on” the independence of the central bank, according to yesterday’s report from the institute.

Significantly Undervalued
Policy makers should make the system “more open and transparent” by designing a mechanism where the yuan is valued against a basket of currencies “as soon as possible,” according to the report. That would send a “clear, convincing” signal that the yuan isn’t pegged to a single currency and that fluctuations are a result of many factors including market demand and supply, the authors said.

The U.S. Treasury Department last month said the yuan was “significantly undervalued,” and urged China to allow it to strengthen, while declining to brand the nation a currency manipulator. Premier Wen Jiabao said in March that the yuan is close to “equilibrium” levels.

China may make the yuan convertible on the capital account by 2020, the institute estimates, basing the projection on the experiences of Japan, Germany and other advanced economies in opening their capital accounts. The yuan could become an international reserve currency within 20 to 30 years, it says.

More Flexible
While China’s leaders haven’t publicly given a timetable for convertibility, which would allow capital to flow freely for investment purposes such as securities transactions, officials told European Union business executives “full convertibility” will happen by 2015, EU Chamber of Commerce in China President Davide Cucino said in September.

Policy makers pledged in a five-year plan running through 2015 to keep loosening controls on currency flows and make the exchange rate more flexible. The central bank in April widened the yuan’s daily trading band against the dollar for the first time since 2007, allowing it to fluctuate up to 1 percent either side of a daily reference rate from a previous 0.5 percent.

China has signed currency swaps with countries from Australia to Mongolia, eased rules to allow foreign companies to invest in the country using yuan raised offshore and promoted direct trading of currencies including the yen. In April, China more than doubled the amount of funds foreign investors can invest in domestic stocks, bonds and bank deposits to $80 billion under the Qualified Foreign Institutional Investor program.

Offshore Center
Standard Chartered Plc Chief Executive Officer Peter Sands said in March he hopes London will as soon as this year become an offshore yuan center where companies can raise funds denominated in the Chinese currency. HSBC Holdings Plc in April became the first European bank to list an international yuan- denominated bond in the U.K. capital.

China will need to retain limits on the yuan even after capital-account convertibility is achieved in order to prevent destabilizing capital flows, according to the institute’s report. “If no strict controls are imposed on speculative hot money, monetary and fiscal policies won’t be effective and the safety of the nation’s financial markets and the real economy could be seriously jeopardized.”

--Zheng Lifei. With assistance from Zhang Dingmin in Beijing. Editors: Nerys Avery, Christian Schmollinger

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

http://www.bloomberg.com/news/2012-0...port-says.html