The Chinese government will allow its currency, the renminbi, to float on international markets sometime within the next five years, said Charles Li, the chief executive of Hong Kong Exchanges & Clearing Ltd (HKEx) on Wednesday, after more than a decade of stable currency policies, which have been routinely criticised overseas, particularly by the U.S.
Li, who runs the world's largest exchange operator by market value, predicted that China would have no choice but to reform its interest-rate system if it wished to cement the yuan as a global currency, insisting that the current system could not last forever.
Speaking during a panel discussion at the Futures Industry Association conference in Boca Raton, Florida, as cited by Bloomberg, Li also said that China would become a net exporter of capital as currency restrictions are relaxed, while the HKEx plans to offer Asia-focused products and explore partnerships with China's own fast-growing trading platforms to take advantage of international expectations.
Last week, the Chinese government introduced policies that will allow foreign financial companies to invest yuan raised offshore in its domestic markets. People’s Bank of China Governor Zhou Xiaochuan reiterated on Tuesday that plans were afoot to gradually reform the exchange rate.
In light of the news, HSBC Holdings similary forecasted this week that the yuan would become fully convertible within five years, according to Bloomberg.
“To become a global currency requires full convertibility,” said HSBC economists Qu Hongbin, Sun Junwei, Paul Mackel and Wang Ju in a research report, cited by the International Business Times. “Although this will be done gradually, Beijing policy makers are now more confident than ever about speeding up the process.”
Presently, the yuan is tightly controlled and can only trade 1 percent above or below the guidance set by the central bank every day on the mainland. The yuan was kept stable for a decade, before China allowed its currency to strengthen 21 percent from July 2005 to July 2008. Appreciation was then halted again for almost two years during the global financial crisis and the currency has advanced 10 percent against the dollar since controls were loosened on June 19, 2010.
Of 20 analysts surveyed by Bloomberg News in November, 12 predicted a further widening by the end of this year and eight forecasted a revision in 2014.
“I would expect China to increasingly move towards a managed float with more flexibility,” said Irene Cheung, a foreign- exchange strategist at Australia & New Zealand Banking Group in Singapore. “Basically convertible is possible in five years, but it might not be 100 percent convertible.”
Huang Yiping, Barclays Plc’s Hong Kong-based chief economist for emerging Asia, however said that China was unlikely to give up total control even if it allowed for basic convertibility.
Meanwhile, the yuan overtook the Russian ruble for transactions in the global payment system for the first time in January, according to the Society for Worldwide Interbank Financial Telecommunications.
Karl Schamotta, a senior market strategist at Western Union Business Solutions, told IBT that as long as China’s GDP growth stays above global growth, central bank reserves should increase their share of yuan holdings, in anticipation of it becoming an international reserve currency. That day is, however, still “a long way off,” he insisted.
“The Chinese yuan is clearly on the path towards becoming a global trade currency, but the country's closed capital account prevents it from becoming a reserve currency,” he noted.