SAFE to continue liberalizing efforts

16:51, March 10, 2010      

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China will continue to forge yuan convertibility under capital accounts, Yi Gang, deputy governor of the central bank and head of the State Administration of Foreign Exchanges (SAFE), said at a press conference Tuesday.

Yuan convertibility has been permitted under current accounts since 1996, while it remains controlled under capital accounts.

The government is already gradually opening up capital accounts, as seen from the increasing maximum investment quotas of Qualified Domestic Institutional Investor (QDII) and Qualified Foreign Institutional Investor (QFII), and QDII and QFII being on the rise, said Lu Zhengwei, a senior economist with Industrial Bank.

Yi, while stating that the goal to liberalize capital accounts is unchanged, pointed out the country will be more wary when advancing yuan convertibility under capital accounts in light of the financial crisis.

Most of the country's crossborder capital flow is legal, Yi said, adding some capital inflow aimed at illegally arbitraging interest differentials between the yuan and the dollar does exist.

The official Xinhua News Agency reported in late December that as of the end of November last year SAFE had cracked down on 10 illegal private banks and smashed 17 illegal foreign exchange deals online and offline involving a total of $3.54 billion. Hot money, which Yi defined as money inflows and outflows aimed at shortterm speculation in a fully liberalized country, appears in China always disguised as legal capital flows via current accounts, foreign direct investment (FDI) and individual money exchange.

Yi said the method of calculating the amount of hot money flowing into the country that relies on subtracting the trade surplus and FDI from the increase in foreign exchange reserves over the year is not accurate, and many other factors including personal foreign exchange income, capital transferred from funds raised in the overseas market by domestic companies, and annual proceeds of foreign exchange assets should also be taken into account.

Contentions about hot money have gained greater profile, as the market is generally bullish on the yuan, particularly after Zhou Xiaochuan, the central bank governor, made a statement over the weekend believed by many economists to imply that the resumption of a gradual appreciation of the yuan is on the way.

SAFE's Yi said management of a floating foreign exchange regime is the longterm goal, while highlighting the role of market forces.

"Given the outlook for strong growth and monetary tightening, capital inflows should remain rather supported," Sebastien Barbe, head of Emerging Market Research and Strategy at Credit Agricole, said in a research note Tuesday.

Barbe believes the resumption of the yuan appreciation may happen in coming weeks or in the second quarter in a gradual process. Economists Peng Wensheng and Chang Jian of Barclays Capital also said in a report Tuesday that a change in the yuan against the dollar could come "as early as AprilMay."

Source: Global Times
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