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China moves slowly on yuan convertibility

China moves slowly on yuan convertibility
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China continues to develop special trade zones to lure foreign investment and as part of the process of liberalising and internationalising China’s currency – the yuan.

Right now the yuan’s value is kept in a tightly controlled band against the dollar, but when it becomes fully tradable it has the potential to be one of the most important currencies in the world.

One of the free trade zones is centred on Qianhai, just across the border from Hong Kong. Yuan convertibility is being trialled there.

The Qianhai zone, administered by the central bank, the People’s Bank of China, lets banks from Hong Kong offer cross-border yuan-denominated loans to mainland firms.

The Hong Kong banks will be allowed to use the reserves they have built to lend in Chinese currency to businesses that have set up shop in the new city. And for the first time ever they would be allowed to set independent interest rates for the loans made to Chinese companies.

But as Professor Chan Yan-Chong from the City University of Hong Kong explained, progress is slow: “Why are they [the central government] taking such a long time? Because they are very cautious. They have to balance the so many different requests from other cities. For example, why Qianhai? Why not Shanghai?”

Indeed Qianhai has rivals such as Shanghai, the country’s financial centre, and even Hong Kong itself.

Beijing has said it wants to speed up the process of making the yuan fully convertible to boost the currency’s use in trade and support wider financial reforms, but right now it seems the road to economic liberalisation is going to be a long march.

There have recently been some moves with the State Council, China’s cabinet, saying it would ask senior members of the National People’s Congress, or parliament, for the power to suspend laws and regulations governing both foreign-owned companies and joint ventures between Chinese and foreign companies in free trade zones, including Shanghai.

The move is aimed at “accelerating transformation of the government’s role… and innovating ways of (further) opening up (to foreign investment),” according to a statement. It set no timetable, and gave no further details.