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Yuan could transform global capital markets, Australian official says
March 26, 2014, 10:12 am

The central bank has already started to implement financial reforms that temporarily caused the yuan to devalue slightly against the US dollar [Xinhua]

The central bank has already started to implement financial reforms that temporarily caused the yuan to devalue slightly against the US dollar [Xinhua]

Philip Lowe, the Deputy Governor of the Reserve Bank of Australia (RBA), has told delegates at the Centre for International Finance and Regulation (CIFR) conference in Sydney that the internationalization of China’ s currency, the renminbi (RMB) – or yuan, and the changes that accompany it, could eventually transform global capital markets.

He added that while China’s transition to a more flexible exchange rate will be gradual, it nevertheless carries with it the “potential to create a seismic shift in the international monetary and financial landscape”.

“Over the past few years, the share of China’s international trade that is denominated in RMB has risen significantly and this trend is expected to continue,” he said.

“We saw the latest step in this transition just last week when the daily trading range for the RMB against the US dollar was widened from 1 per cent to 2 per cent,” Lowe said.

Last week, China’s Central Bank, working in tandem with the new financial reforms set by the government at the beginning of the year, doubled the trading range of the renminbi, allowing it extra flexibility in valuation.

Almost immediately, the renminbi dropped 0.5 per cent to 6.23 against the greenback.

Overall, the renminbi has fallen almost three per cent against the dollar year to date.

In November, the People’s Bank of China (PBOC) said it was examining further widening the renminbi’s daily trading band as it boosts the currency’s convertibility.

PBOC Governor Zhou Xiaochuan was quoted by Bloomberg in a newly published book saying the central bank will cancel volume limits on trial programmes that give foreign fund managers access to Chinese capital markets and Chinese managers to foreign markets, as it speeds up efforts to boost the yuan’s convertibility.

“China will speed up the process for the yuan to become fully convertible and strengthen supervision on hot money,” Zhou wrote.

Quotas under the qualified foreign institutional investor programme and the qualified domestic institutional investor programme will be expanded and then erased, added Zhou.

Since then, however, the yuan has been hit by recent local market data indicating that China’s powerhouse economic dynamo, which in previous years helped pull the world out of recession, may be slowing down.

There has also been speculation among Chinese traders that the Central Bank may have encouraged large financial institutions to buy foreign currencies as a means of moderately depreciating the yuan

The move comes amid a report from Xiamen University in Fujian province that GDP growth will decrease to 7.62 per cent in 2014 from 7.7 per cent in 2013.

While the drop is very moderate – growth was 7.8 per cent in 2012 – it does indicate a slowdown trend.

The situation is exacerbated by fears the bustling real estate sector in China is also slowing down.

Source: Agencies