Chinese renminbi on its way to full convertibility

SINGAPORE: The Chinese currency renminbi (RMB) could achieve full convertibility by 2020, and that is a conservative estimate, said the director of the Office of Financial Services of the Shanghai city government, Fang Xing Hai.

Speaking at a conference in Singapore, Mr Fang said China intends to speed up the process.

The RMB has come a long way since the Chinese government took steps to liberalise the currency in 2009.

Standard Chartered Bank said the cumulative trade settled in the currency totalled over 5.5 trillion yuan as at the end of last year.

Today, nearly 14 percent of China's trade is settled in RMB, up from just 3 percent in 2010.

By 2015, Standard Chartered said it expects 20 percent of Chinese trade to be settled in RMB.

China aims to step up efforts to make RMB freely tradable by 2020, amid economic reforms under the new Chinese leadership.

Mr Fang said: ?My own assessment is that we are actually slightly behind market demand. Obviously convertibility cannot be done overnight. It takes a period of time to achieve it but the time has come to speed up that process. In our system, without this goal of making the currency convertible, I can almost certainly say that interest rate liberalisation and exchange rate liberalisation will never be fully achieved."

Mr Fang said there is a renewed sense of urgency for the RMB to become fully convertible as more Chinese firms are investing overseas and the lengthy approval process to move capital aboard currently could derail deals.

However, some observers said there are concerns that by opening up its capital account too quickly, China could expose itself to large capital inflows and outflows which could destabilise or distort the market.

For instance, they said the fact that China was not badly hit during the Asian financial crisis was because its capital account was not subjected to disruption.

There are other issues to look out for as well.

Lim Cheng Teck, CEO and executive vice chairman at Standard Chartered Bank, said: ?The onshore rates and offshore rates are different. How do you prevent people from arbitraging the interest rates? So how do you ensure that both the rates converge in a manner that is driven and dictated by market forces, rather than allowing people to have arbitrage opportunities? When you have arbitrage, you encourage speculators and speculators tend to distort the real economy."

Samuel Tsien, group CEO at OCBC Bank, said: "Along the way there will be hiccups, there would be risks, there would be financial plays, there may be international funds doing things which may be detrimental to the RMB's future development, coordinated international funds flow playing against the currency.?

Recognising these potential challenges, Mr Fang said every reform carries risks, but China will be able to manage them.

The development of RMB as an international currency has also propelled Hong Kong to be a key yuan trading hub - a position that is also sought after by financial centres like Singapore and London.

But Hong Kong is a step ahead of Singapore.

Mr Tsien said: "It is not going to be easy because we don't have a natural supply of RMB as Hong Kong and Taiwan have. We also have a currency that is relatively strong, so the currency play that sometimes applies may not be as attractive as well. I think the region needs a region for RMB and Singapore is now assuming this role. " ?

Source: http://www.channelnewsasia.com/news/business/international/chinese-renminbi-on-its/738024.html

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