HSBC’s group chief executive yesterday argued that concerns over China’s shadow banking sector were overdone, and reaffirmed the bank's view that the renminbi will be fully convertible within three years.

Much of the pessimism about China’s growth prospects is ‘unjustified’, said Stuart Gulliver, speaking at an HSBC investor forum.

Citing the shadow banking as an example, he argued that pain for borrowers in that sector is inevitable but manageable, adding that the risk of bond default by entities related to banks or local governments remains low.

As for concerns over trust companies, which provide wealth management products and form part of shadow banking, Gulliver said only 9% of trust assets are run under such entities and that the default risk is limited.

As for RMB convertibility, "the sheer scale and speed of reform now leads us to believe that China can achieve this by 2017", he noted.

This follows similar comments reportedly made in October by Anita Fung, HSBC's Hong Kong CEO. “We expect the yuan to be fully convertible in 2017 in terms of meeting trade settlement and investment needs,” she was quoted as saying.

China is trying to liberalise the RMB as an international currency with the ultimate goal that it will become a reserve currency. Full convertibility is a crucial step for achieving this.  

“This isn’t to say that the reminbi is on course to usurp the dollar in the short or even medium term,” said Gulliver. “It isn’t. It took nearly two decades for the US dollar to match the British pound’s share of global reserves after the US became the world’s largest economy.”

Qu Hongbin, HSBC’s Greater China chief economist, said at the same forum that China will drive RMB convertibility via further expansion of the qualified foreign institutional investor programme, which allows foreign investors to access mainland securities.

Renminbi take-up could also be accelerated in other ways, noted Gulliver – for example, by inclusion in the basket of global currencies used by the International Monetary Fund for its special drawing rights. (SDRs are supplementary foreign exchange reserve assets defined and maintained by the IMF.)

“This would be a powerful affirmation of the RMB’s status as a global currency of the same stature as the dollar, yen, euro and pound,” he said. “Although the practical consequences would be limited, the symbolic impact could encourage central banks to add RMB assets to their reserve portfolios.”

However, China’s economy will come to a critical juncture in the next two to three years, which will decide whether it will perform extremely well or extremely badly, said Eswar Prasad, Nandlal Tolani senior professor of trade policy at Cornell University and former head of the China division at the International Monetary Fund. One risk is that China’s reform process could create legacy problems.

But Qu was more optimistic. He argued that China faced an even worse scenario when former prime minister Zhu Rongji was in office in the late 1990s. At the time, the country’s state-owned enterprises were making losses, banks had high gearing ratios and foreign exchange reserves stood at less than $200 billion (as against some $3.8 trillion today).