PBOC announces full yuan convertibility for free trade zone
(14 December 2015 – China) The People’s Bank of China (PBOC) last week announced that the yuan would be freely convertible for corporations registered in three Chinese free-trade zones in Guangdong, Tianjin and Fujian.
However, the move comes with conditions attached that have some analysts criticising the move as not going far enough.
The key change comes at a time when the yuan has touched four-year lows. The onshore yuan ended down 175 basis points on Friday, or 6.4553 against the US dollar, while the offshore yuan touched 6.5322.
The central bank attached two key qualifications for the opening: corporations should not be engaged in certain sensitive industries on a government “negative list”, and the convertibility will be subject to an annual limit of US$10 million (A$14 million).
The landmark announcement has been 15 years coming as China’s leadership first signalled its willingness to eventually liberalise the capital account upon becoming a member of the World Trade Organisation in 2001.
The limited opening falls short of the goal to achieve full convertibility across the nation by 2016, as promised by central bank governor Zhou Xiaochuan in 2011 when the yuan liberalisation process began in earnest under his leadership.
The current package has come with other sweeteners, including support for banks located in the free trade zones to develop forex-related derivatives businesses; simplified procedures for registered corporates to issue offshore yuan-denominated debt; and the opportunity for Hong Kong and Macau institutions to develop yuan-denominated cross-border financing, credit guarantees and asset sales from the zones.
Given the yuan’s continued strength against the euro, Japanese yen and Korean won, it would require a further 20 to 40 percent depreciation against the US dollar to put it on an equal footing, according to analysts.
Subscribe