China should relax controls on its capital accounts and let its currency, renminbi, achieve “basic convertibility” over the next 5 years amid its push for the deeper internationalization of the currency, a senior executive of the People’s Bank of China said.
Ge Huayong, director of the central bank’s personnel department, said China should consider further relaxing its capital account controls to an “appropriate degree” on commercial credit, securities investments, overseas direct investment, as well as personal capital flows, Dow Jones Newswire reported on Monday, citing an article that Ge wrote for China Finance, a bimonthly magazine of the central bank.
Ge didn’t elaborate on his view of “appropriate degree”.
China’s strong economic base and a sound financial system provide favorable conditions for the nation to promote the convertibility of renminbi under the capital account, said Ge, though admitting China’s capital account controls are stricter than those in other emerging markets, such as Brazil, Russia and India.
Ge suggested that China should consider the needs of the domestic financial market during the progressive convertibility of its currency, adding that the country should also strengthen counter-cyclical management on capital inflows into the banking system.
“The building pressure of capital inflows may force us to slow the pace of any capital accounts opening,” Ge said. Still, new hedging tools could be used to lock up additional liquidity, he said.
The remarks by Ge echo growing sentiments which suggest that greater convertibility of the renminbi may be achieved in the near to medium term.
Zhou Xiaochuan, China’s central bank governor, said at the Lujiazui Forum in Shanghai on May 20 that when cross-border use of the renminbi hits a certain level, there will be a natural demand for full convertibility.
China has been trying to improve the renminbi’s global clout by encouraging its use in foreign trade and investment. Zhou’s remark to “cautiously” allow the Chinese currency to be used in cross-border financial deals would mark a further step to making it a major world reserve currency. China launched a pilot program in 2009 to allow banks to conduct trade settlements using renminbi in four cities.
Dai Xianglong, the former central bank chief, said last month that the renminbi will be used widely in the international market and become a reserve currency in 15 to 20 years. He also expected the renminbi to become a major currency in the International Monetary Fund’s special drawing rights by 2015.