Execs welcome prospect of full RMB convertibility

They see it as a natural progression, although timing remains uncertain, after China's central bank moves to curb speculation by proposing the next step to full convertibility.
Execs welcome prospect of full RMB convertibility

Investment industry executives in Asia have welcomed proposals by China's central bank to make the next step to full renminbi convertibility for capital accounts.

This latest move to internationalise the Chinese currency and open the mainland's capital markets to foreign investment was unveiled by the People’s Bank of China after a meeting led by premier Li Keqiang on May 6.

The proposal will include a mechanism to allow individuals to invest overseas, while the trading band is set to be widened in the near future.

The proposed new measures were introduced to curb currency speculation after the renminbi hit a series of record highs in recent weeks. As a result, the currency fell the most in Hong Kong's offshore market in more than a year yesterday, while the onshore spot rate also fell. 

“For China, capital account liberalisation is a natural progression from current account convertibility,” says Lian Chia-Liang, Asia head of investment management at Western Asset Management.

“China is now the second largest economy in the world. Never in recent history has the currency of the world’s second largest economy not played a more dominant role. Over time, the [RMB] should be convertible.”  

Ultimately, liberalisation of the renminbi will push more offshore domiciled investors to put their money to work back on the mainland, which will lead to a convergence of onshore and offshore fixed income markets, Lian notes.

“Operationally, dim-sum [Hong Kong-issued RMB] bonds are an efficient way for offshore [managers] in Hong Kong and Singapore to take exposure to China,” he adds. “In theory, and with full capital accountability over the long run, the offshore market ought to converge with the onshore market. This [would be] probably the ultimate landscape for the Greater China fixed income market.”

The move will also loosen Beijing's control over its currency and interest rates, awarding China-based fund houses more freedom, says Yim Fung, president of the Chinese Securities Association of Hong Kong. “When the RMB is liberalised, Chinese fund houses will enjoy flexibility and innovation,” he tells AsianInvestor.

It will open up opportunities for international investors as well, says Jessie Pak, Asia director of sales at FTSE based in Hong Kong. “A lot of the developments in the government’s policy are very positive. There’s certainly a lot of demand from international investors.”

Some reports say full convertibility will arrive by 2015, although most agreed that a two-year timeframe is too optimistic.

“It’s really hard to tell when [the yuan] will be fully convertible,” says Pak, noting that the Chinese government implements changes very deliberately. “China tends to do things on a step-by-step basis.”

Western’s Lian echoes this view. “Chinese policymakers have a concept – move one step at a time. Figuratively speaking, with each step, you feel the stone under the water first. Once you know you’re on solid footing, then you go forward and take the next step.”

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