China is close to its goal of making the renminbi convertible for investment purposes, a senior Chinese central banker has said, highlighting Beijing’s view that strict controls on cross-border capital flows are consistent with convertibility.
China is actively seeking the International Monetary Fund’s endorsement of the renminbi as an official reserve currency, a designation that requires a currency to be “freely usable”.
Yet the comments by Pan Gongsheng, deputy governor of the People’s Bank of China, highlight how China’s vision of convertibility falls well short of the unfettered trading that many foreign investors and deregulation enthusiasts hope for.
“Having passed through many years of reform, currently China is already not too far from its goal of capital-account convertibility,” Mr. Pan said at a wealth management conference in the port city of Qingdao.
Mr. Pan cited the impending launch of a programme to allow individual Chinese investors to purchase foreign financial assets directly as one of the few remaining hurdles to achieving full convertibility.
China first established renminbi convertibility for both trade and investment as a long-term goal in 1993 and has reiterated it many times since, including in the landmark economic reform blueprint that top Communist party leaders endorsed in November 2013.
Yet the PBoC has also indicated that its vision of “convertibility” does not involve the kind of unrestricted capital flows that wreaked havoc on emerging markets during the 1998 Asian financial crisis and again during the global financial crisis in 2008.
“The capital account convertibility China is seeking to achieve is not based on the traditional concept of being fully or freely convertible,” PBoC governor Zhou Xiaochuan told the IMF in April.
“Instead, drawing lessons from the global financial crisis, China will adopt a concept of managed convertibility.”
China has taken important steps in recent months to expand access to its domestic capital markets, while also giving its own citizens more freedom to invest overseas.
In November it launched the Shanghai-Hong Kong stock connect, allowing foreign investors to purchase Shanghai shares without prior approval. Mr. Pan on Sunday cited plans to roll out a similar programme for mainland shares traded in Shenzhen as another milestone.
In May, the central bank widened access to its domestic bond market for 32 large foreign asset managers.
Even with capital controls still in place, China suffered its largest-ever capital outflow in the first quarter of 2015, highlighting the risks of further deregulation.
Equity index provider MSCI this month declined to add domestically traded Chinese shares to its global benchmarks, citing continued limitations on international access. But MSCI also signaled that China's inclusion was likely within a few years.
Rather than pursuing full convertibility, China is instead focused on achieving at least partial convertibility for the 40 capital-account transactions that the IMF tracks in its annual report on foreign exchange restrictions.
The IMF’s 2014 report classified the renminbi as “fully” or “partly” convertible on 35 items, with most of the remaining five related to cross-border investment by individuals and the sale of stocks and bonds by foreign companies.
Analysts say the PBoC is prepared to declare that full convertibility has been achieved once all or most of the five remaining items are “partially convertible”, even if investment remains subject to approval requirements and quotas.
The largest channels for cross-border capital market investment are typical of China’s approach. Asset managers using the Qualified Foreign Institutional Investor or Qualified Domestic Institutional Investor programmes must obtain a licence, with the scale of investment limited by quotas. The upcoming individual outbound investment programme, known as QDII2, will also be subject to quotas.
The PBoC wants “to create a favorable regulatory framework to facilitate the free flow of renminbi across the border, while protecting China’s economy from the risk of volatile capital flows”, Jianguang Shen, China economist at Mizuho Securities Asia, wrote in a note on Monday (June 22).
By Courtesy of FT
