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China’s five-year plan to take yuan global

To reach their goal of turning the yuan into a global currency, China’s leaders are willing to push for full convertibility and eventually swing open the country’s capital account.

world Updated: Aug 25, 2011 00:34 IST

To reach their goal of turning the yuan into a global currency, China’s leaders are willing to push for full convertibility and eventually swing open the country’s capital account.

That was the apparent message Chinese vice premier Li Keqiang delivered on his visit to Hong Kong last week, when he outlined a series of steps to boost the territory as a place where the yuan can trade with fewer constraints.

The measures, which include allowing foreign investors to buy up to 20 billion yuan ($3.1 billion) of mainland Chinese stocks and bonds, encourage foreign demand for yuan by giving investors more places to invest the currency. To be sure, a freely convertible yuan isn’t right around the corner — China’s leaders face an arduous journey that will involve numerous political and economic pitfalls.

“Things are all going as planned but an international yuan is four or five years away, at the earliest,” said Mark Williams from Capital Economics in London. “To say right now how China’s future currency regime would look is pure speculation at best.”

China has already made significant progress in Hong Kong, its testing ground. The yuan is nearly convertible in that territory. But, among other steps, China needs to first free its interest rate market, relax investment curbs in its equity and bond markets, and allow investment funds to leave and enter China with ease before the yuan can be made convertible.

Having a convertible yuan — or one that can be readily bought or sold with few restrictions — is a precondition for Beijing’s long-sought goal of promoting the Chinese currency as one used for global trade and investment.

By encouraging the free trade of the yuan in Hong Kong and creating new channels for that money to flow in and out of the mainland, Beijing is refining a template that could prove valuable once it decides to liberalise the currency more widely.

Even before Standard & Poor’s triggered a rout in world financial markets this month by stripping the United States of its top-notch debt rating, Beijing had already made clear it intended to relax its grip on the yuan.

Under the five-year plan unveiled in March, Beijing aims to expand the use of the yuan in international markets and “gradually make the yuan convertible on the capital account.”