Money

Experts: Yuan will float freely in 3 years

By Wang Xiaotian (China Daily)
Updated: 2011-06-27 10:31

BEIJING - China's timing for realizing the yuan's full convertibility into other currencies is already mature enough to facilitate yuan's internationalization, and the country will be able to liberalize currency exchange rates in three years, a leading economist said on Sunday.

"If the yuan is not convertible, we do not need to discuss the currency's internationalization at all, let alone including the yuan in the Special Drawing Right (SDR) currency basket of the Intentional Monetary Fund (IMF) as a reserve currency," said Huang Yiping, a professor of economics at the China Center for Economic Research, Peking University.

He made the remarks at the Second Global Think Tank Summit in Beijing.

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In 1996, China made the yuan convertible into other currencies when settling trade, but hasn't allowed transactions of local financial assets into foreign assets at market exchange rates, fearing that such a move would stoke real estate and equity bubbles.

Huang said it is the right time for the Chinese government to remove the threshold for converting yuan into other currencies under the capital account, thereby creating the possibility for the yuan to play an important role in global trade and investment.

The yuan needs to be more freely convertible and widely used in global trade to be included in the SDR basket of the IMF, John Lipsky, acting managing director of the IMF, said earlier this month in Beijing.

"It is agreed that the renminbi is likely to become a candidate for inclusion in the SDR basket but it needs to become more freely and widely used in international transactions," Lipsky said.

"If we look at China's macro environment, including fiscal conditions, financial system and our external account situation, I think all of these are much better than those of countries such as Indonesia, India, Russia, when they just opened up capital accounts," Huang said.

Huang admits that liberalization of the capital account does not mean there will be no limit for capital flows.

"For example, we can put short-term capital flows under control through Qualified Foreign Institutional Investors and Qualified Domestic Institutional Investors regulations."

Wu Xiaoqiu, senior finance professor of Renmin University of China, said earlier that China could achieve full convertibility of the yuan by 2015.

The World Bank said in a report last month that by 2025 the yuan could become a major global currency together with the US dollar and the euro.

But some observers worry that full convertibility of the yuan and a market-based exchange rate will impose great liquidity pressure on the world's second economy, causing rising inflation and asset bubbles.

"The problems of China's economy are made in Washington," said Ronald McKinnon, economics professor at Stanford University, told China Daily on Sunday.

"The near-zero interest rate of the US has caused 'hot money' inflows into China, and the Chinese central bank has big trouble controlling this."

China's capital control on inflows is probably right and the yuan's exchange rate should remain stable to fend off these risks, he said.

"There is no 'U-turn' way left for China," said Huang, "and the exchange rate of the yuan will definitely float freely in two or three years."