China expects currency breakthrough within 5 years

09:26, March 14, 2011      

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China will achieve a major breakthrough in full convertibility of the yuan over the next five years, Hu Xiaolian, deputy governor of the People's Bank of China, said on Friday.

However, no detailed timetable has yet been set.

"Conditions for the yuan's convertibility under the capital account are improving and the fast development of yuan-based cross-border trade settlements will help push the process forward," Hu told a news briefing.

Xia Bin, an adviser to the central bank, recently said that China should aim to achieve full convertibility of the currency by 2020 given the country's rising economic power.

He also urged reform of the country's exchange-rate regime by integration with the floating exchange rates of the international system. Xia said China should aim to make the yuan account for about 3 to 4 percent of the total international reserves by 2020.

China is actively pushing the internationalization of its currency by allowing its companies to make overseas investments in yuan. The central bank is also considering giving foreign companies the green light to make yuan investments in China.

However some economists warned that under current market conditions a more convertible yuan could lead to substantial appreciation of the currency and huge capital inflows.

China needs to make its exchange-rate regime more flexible to ward off those risks," said Chen Daofu, senior economist of the Financial Research Institute at the State Council's Development Research Center.

Meanwhile, there is speculation that China will speed up the pace of yuan appreciation to ease the high inflationary pressure.

The consumer price index (CPI), a major gauge of inflation, rose 4.9 percent year-on-year in February, according to the National Bureau of Statistics.

"A faster rate of appreciation is a policy tool that could be used to ease inflationary pressure, given that imported inflation remains a source of concern to the government," Jian Chang, an economist at Barclays Capital, said in a report.

"We continue to look for a gradual yuan appreciation versus the US dollar at a pace of around 5 percent a year," Chang said.

However, the central bank governor, Zhou Xiaochuan, said at Friday's news briefing that exchange-rate policy is not major tool to tame inflation, although changes in the exchange rate will influence the overall level of domestic prices.

Zhou said that the central bank will keep the yuan's exchange rate stable and will continue to gradually push forward exchange rate reforms.

Source: China Daily
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