Poll: China’s Yuan Convertible by 2016

Most global investors predict China’s yuan will be convertible into other currencies by 2016, with 50 percent seeing it joining the dollar, yen and euro as a reserve currency within a decade, a Bloomberg poll indicated.

Fifty-seven percent of 1,263 Bloomberg customers surveyed who are investors, traders or analysts, including 58 percent of Asian respondents, said it’s likely the yuan will be convertible in five years. Nineteen percent of respondents said it will become a reserve currency in that time, with an additional 31 percent predicting that step within a decade.

The decision would mark one of the biggest policy changes since China embraced private enterprise three decades ago, enabling fund managers to more freely invest in the world’s No. 2 economy. Convertibility would help unlock domestic Chinese savings, now at 75.6 trillion yuan ($11.6 trillion), equivalent to more than 80 percent of U.S. gross domestic product.

“If we get to the stage that the yuan is convertible and there’s a liquid government bond market available to invest in, it would mean that the Chinese yuan becomes a possible viable alternative to the dollar,” said Mansoor Mohi-uddin, chief currency strategist at UBS AG in Singapore, the world’s third- biggest foreign-exchange trader. “The euro hasn’t been able to fulfill that.”

China Advantage

While the dollar’s share of global reserves fell after the euro’s 1999 introduction, it has held above 60 percent in recent years, International Monetary Fund data show. One advantage for China over the euro region would be a single national government, avoiding the disputes arising from the sovereign-debt crisis that enveloped Greece, Ireland and Portugal.

China is taking steps to make the yuan more accepted abroad short of convertibility, such as setting up an offshore market for yuan transactions in Hong Kong. It has also entered into currency swaps with nations from Indonesia to Argentina, and denominated some overseas loans, including to Venezuela, in yuan. In Hong Kong, McDonald’s Corp. (MCD), the world’s biggest restaurant chain, sold yuan-denominated bonds last year.

“Certainly we have seen huge steps pointing towards that direction,” said Marcelo Ricaud, a fixed-income sales manager at Standard Chartered Plc in London who participated in the poll, referring to convertibility. “It is interesting to follow the increase in volume” of the offshore yuan in Hong Kong, he said.

Yuan Bonds

Sales of yuan-denominated bonds in Hong Kong have climbed to 40 billion yuan so far this year, from 36 billion yuan last year, data compiled by Bloomberg show.

Yuan deposits in Hong Kong rose to a record 451.4 billion yuan in March and may climb to 870 billion yuan by year-end, Zhang Guangping, deputy director general of the China Banking Regulatory Commission’s Shanghai branch, said last month.

French President Nicolas Sarkozy said in March that work should start on including the yuan in the currency basket used for the IMF’s Special Drawing Rights. At a March 31 conference in Nanjing, European Central Bank President Jean-Claude Trichet said the idea is “worth discussing.”

In 2009, People’s Bank of China Governor Zhou Xiaochuan proposed making SDRs, the unit of account for IMF loans that’s also held by central banks, function as a working global reserve currency.

Faster Than Expected

“Zhou Xiaochuan has laid out a coherent plan for having the yuan become a major global currency, including becoming a constituent of an expanded SDR — convertibility is part of this plan,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “The authorities have started implementing the plan and progress has been faster than most expected. I think that will remain the case.”

The yuan was at 6.4976 per dollar at 11:35 a.m. Shanghai time, according to the China Foreign Exchange Trade System. The currency reached 6.4892 on April 29, the strongest level since 1993. It isn’t allowed to move more than 0.5 percent either side of the central bank’s daily fixing, which was 6.4948 yesterday. The yuan has gained about 5 percent in the past year.

By contrast with investors in the poll, many economists don’t see the yuan becoming fully convertible until 2020 or later because making the move earlier could stoke real estate and equity bubbles. A new generation of leaders, scheduled to come to power starting late next year, will not want to risk disrupting the economy, said Brian Jackson, a Hong Kong-based strategist with the Royal Bank of Canada.

Leadership Transition

“It’s a slow-moving process,” Jackson said. “There are a lot of reforms, especially in the financial sector, that need to be done. I think it could be delayed by a factor that we are going to have a transition to a new leadership over the next couple of years.”

Wang Tao, a Beijing-based economist and colleague of Mohi- uddin’s at UBS, declined to predict a time-frame for yuan convertibility. “China will have to put in place a sound financial, macro-control and exchange-rate regulatory framework” to enable the step, she said.

Meantime, respondents were less optimistic about Chinese government policies helping the investment climate than in past surveys. Fifty-one percent said they were optimistic President Hu Jintao’s policies would help investors. That is lower by about 10 percentage points than in three previous polls dating back to September 2010 where that question was asked.

Asian Leaders

Still, investors had more confidence in Hu’s government than in India under Prime Minister Manmohan Singh, Singapore under Prime Minister Lee Hsien Loong, and Japan under Prime Minister Naoto Kan, who tied with Sarkozy at 25 percent as the leader whose government policies investors judged to be the least promising.

Among Asian investors, 63 percent were optimistic about Hu and China, with 14 percent saying the same about Kan.

China ranked as the third-best market for investors over the next year behind the U.S. and Brazil, with 24 percent of respondents saying the country was among the world’s top two investment opportunities. Even so, that figure was the lowest among seven investor polls dating back to October 2009, though almost even with January’s findings.

Fifty percent of poll respondents and 62 percent in Asia predicted the MSCI Asia Pacific Index would be higher six months from now. In a January poll, 58 percent of all respondents said the index would be higher a half year later and in a November poll 64 percent predicted a rise. The index is little changed from the start of the year.

Japan’s Stocks

Forty-one percent of respondents, including 47 percent in Asia, predicted that the Nikkei 225 (NKY) Stock Average would be higher in six months, with 23 percent saying the index would be lower.

Fifty-four percent of respondents, including 67 percent in Asia, said that Japan’s economy will shrink in the year following the March 11 earthquake and tsunami. Ten percent of investors say Japan can escape deflation within the next year, and 21 percent say it will take more than five years.

Goldman Sachs Group Inc. economists on May 10 lowered their forecasts for Japan’s gross domestic product for 2011, saying GDP will shrink 0.2 percent this year and expand 2.6 percent in 2012. Goldman Tokyo-based analysts Naohiko Baba and Chiwoong Lee had previously seen a 0.7 percent gain for this year and 2.3 percent growth in 2012.

Highest Since 2009

At the same time, 15 percent of respondents said Japan gave investors the best opportunities among global markets, the highest percentage saying that in seven polls dating to October 2009.

“The Japanese equity market is largely discounting the reconstruction story,” said Manoj Wanzare, senior portfolio manager at Plato Investment Management in Sydney and a participant in the global poll that was conducted May 9-10.

Wanzare said he expects the Japanese economy to have an “uptick in activity” within the next six to 12 months as reconstruction spending rises.

The poll was conducted by Des Moines, Iowa-based Selzer & Co. for Bloomberg and has a margin of error of plus or minus 2.8 percentage points.

–Michael Forsythe, Andrea Wong. With assistance from Zheng Lifei in Beijing and Chinmei Sung in Taipei. Editors: Chris Anstey, Peter Hirschberg

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