The Chinese authorities announced a series of measures in recent weeks to allow for easier on and offshore movement of the renminbi. These include: widening the band in which the renminbi can trade; increasing the quota for the qualified foreign institutional investor (QFII) and the renminbi-QFII (RQFII) schemes; and allowing local residents of Wenzhou to make direct overseas portfolio investments on a trial basis up to a limit of $200 million per person per year. The policy and regulatory announcements suggest that full capital-account liberalization could happen sooner than many expect.
| RMB exchange rate regime reform |
| Source: PBoC, Barclays |
“It is widely agreed that greater currency flexibility is a pre-condition for further opening up of China’s capital account,” wrote Barclays in a report on April 20. “While opinions differ on the pace and sequence of the liberalization, and the International Monetary Fund last year officially gave the nod to capital controls by developing economies, there is little doubt that this is an inevitable process of a country’s economic and financial market development. “China may achieve basic convertibility of the capital account around 2015, meaning most restrictions on cross-border capital flows, except for a small number of areas such as portfolio investment, will be removed.”
Meanwhile, after the widening of the trading band, Barclays expects greater volatility in the US dollar-Chinese renminbi rate but remains positive on renminbi appreciation for this year and beyond.
“Two-way fluctuations mean the currency could depreciate against the US dollar relatively easily, if China’s growth and financial risks point in such a direction or US dollar cross-rates rebounded sharply,” the report said.
“For the full year 2012, we maintain our 2% appreciation forecast for the renminbi versus the US dollar, and expect it to happen in H2 [second half of 2012], as export growth recovers, capital inflows increase and the US election enters its final stage. In the medium to long run, we remain optimistic on the renminbi’s outlook.”
The move to allow a greater trading range for the renminbi might also mean there will be less need for the People’s Bank of China to intervene in the currency market, which should restore monetary policy independence and promote a more effective domestic policy.