New PRC Leaders' Fully Convertible Yuan by 2015?

With the new Chinese leadership coming in early next year with Premier-Elect Xi Jingping, leaders' promises to make the yuan (renminbi) fully convertible gain urgency given China's slowing economy. Last year Chinese officials told their EU counterparts that convertibility would come "by 2015." Lest you think that this was an offhand statement, market commentators have this year raised expectations of this coming true. Even the outgoing central bank governor indicates that his successor will make this move:

China’s central bank governor said convertibility will be the next step in the overhaul of the exchange-rate system as calls grow for the nation’s new leadership to deepen changes in the economy to sustain growth.“For the central bank, I think the next movement related to the yuan is going to be reform of convertibility,” Zhou Xiaochuan said at a conference in Beijing on Nov. 17. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.” 

Interestingly enough, even party-favoured elites who've benefited from previous policies see the writing on the wall and accept that state banks lending large sums to state-owned corporations must be curbed. Capital account liberalization is but a part of a whole range of reforms to make China more market-oriented:

“Expectations are high” for change as government intervention, ranging from excessive regulation to rigid price controls, has become “unbearable” over the last couple of years, said Li Jiange, head of the country’s biggest investment bank and a vice chairman at the government-run company that holds stakes in state-owned lenders. Li, who spoke at a separate conference in Beijing on Nov. 17, is chairman of China International Capital Corp., and a vice chairman of Central Huijin Investment Co., a unit of the nation’s sovereign wealth fund.

Unless you listen exclusively to American politicians b*tch and whine about China, the RMB has already appreciated considerably in nominal terms--by about a third. Moreover, a recent HSBC poll of China-based firms also expects 33% of their transactions to be yuan-denominated come 2015. Hence, full convertibility is envisioned to be a natural progression in a sequence of steps towards China opening up to the world economically:

The yuan has appreciated about 33 percent against the dollar since the revaluation. The currency had its biggest weekly gain in a month in the five days through Nov. 16...“Interest rates should be liberalized, rates should be decided by market demand and supply,” [Justin Yifu] Lin, a former World Bank chief economist, said at a forum in Beijing yesterday. 

China’s financial system is dominated by large state-owned banks and the stock market and favors big “capital-intensive” players, said Lin, who is a professor at Peking University’s China Center for Economic Research. China must develop small, local banks to serve rural areas and small businesses, he said.

Lin was at the World Bank when it published a 448-page report in February titled China 2030, which outlined policies to help the nation sustain growth while avoiding the so-called middle-income trap, where expansion slows because of a failure to implement reforms needed to create a wealthy middle class. 

Actually, I do not expect full convertibility to be achieved by that date. Rather, significantly relaxed controls on the capital account may be adjudged as more practical and realistic by the PRC leadership come 2015. Moreover, there will likely be more market-determined rates of lending insofar as credit is extended more to SMEs and non-SOEs. In any event, I am in agreement that the RMB will not appreciate much more. Not only is China's growth slowing relatively speaking, but  more importantly it's certainly no longer as undervalued as it once was.

Things change, my dear.