China's Plan on Full Yuan Convertibility in 2015

Decisions made in this building shake the world.

It's kind of hard to relinquish on Stalinesque, iron-fisted control once you get used to it: Around 2011, PRC official sources made some noises giving tacit support to the idea that their currency the yuan (RMB) would be fully convertible by 2015. Through fits and starts the yuan has gradually appreciated since then, but now the People's Bank of China (PBOC) has come to an important fork in the road of monetary development: to become fully convertible or not? That is the question that needs to be resolved before 2015 rolls around.

Just like an anxious bride-to-be antsy about leaving the familiar past for an uncertain future, the PBOC is showing second thoughts about leaving behind a monetary system that has proven relatively stable during China's transition to becoming the world's second-largest economy:

China is quietly pushing back its loose timetable to make the yuan freely convertible, policy insiders say, as authorities fear removing capital controls too soon could unleash damaging speculative flows that will make it harder to reshape the economy.

There has never been a hard target date for a freely traded yuan, although the central bank had outlined a goal of making it 'basically convertible' by 2015. That rhetoric has been toned down recently, and now analysts are looking to 2020, a deadline implied by the government's reform agenda set out last November.
 
Heading off a sharp slowdown in growth and domestic reforms, such as fixing the fiscal system to rein in debt, overhauling banks and state conglomerates will be done first, according to economists at top government think-tanks and policy advisers.

"Opening up the capital account will be the last of reforms. We need to improve domestic financial markets and improve legal systems first," said an influential former central bank researcher who now works for the government. "That was the reason why other emerging markets were hit by speculators," said the researcher, who requested anonymity.

A slowing Chinese economy does not quite inspire confidence. Nor does the experience of premature liberalization a la the Southeast Asian nations prior to the 1997 Asian financial crisis. With speculative flows showing few signs of letting up, authorities fear a deluge of inflows that will hurt Chinese competitiveness in export markets:

While the yuan is already convertible under China's current account, the broadest measure of trade in goods and services, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing.

Nearly one-fifth of China's trade is now settled in yuan, up from less than 1 percent in 2009, when internationalisation was seen as a way for firms to reduce currency risks and also to challenge the U.S. dollar's role as the key reserve currency.

As the yuan is increasingly used in trade and investment, as well as in offshore yuan trading hubs, investors have sought to skirt capital controls by exploiting various loopholes - some of which could remain until the currency is fully liberalised.

The government keeps a tight grip on speculative flows, but under the yuan internationalisation scheme, firms can move their funds across the border via trade settlements. One method is to borrow funds cheaply overseas and move them into China to profit from China's higher interest rates and, at least until earlier this year, a view the yuan would steadily rise. The funds are later repatriated.

In other words, don't hold your breath waiting for full yuan convertibility in 2015...or 2016, 2017, 2018 and 2019 for that matter. 2020 is the more realistic target date, but still. Reuters has a video clip of this story as well.