China Said To Scrap Currency Controls By 2020

Chinese leaders are set to announce a deadline of 2020 to dismantle currency controls which have kept the world’s second-largest economy from fully integrating with global financial markets, Bloomberg reports.

Top leaders in China will convene in Beijing over October 26-29 for the fifth plenary session — a key four-day policy-setting meeting that will be closely eyed by global investors — were they will discuss pledging to “make the yuan convertible under the capital account,” Bloomberg said, citing a person familiar with talks that are under way.

China has been pushing to bolster global yuan usage ahead of next month’s International Monetary Fund (IMF) review of its reserve-currency basket, known as the Special Drawing Rights (SDR).

Xinhua, a Chinese state-run news agency, reported on Thursday that the UK supports the yuan’s inclusion in the IMF’s currency basket.

Scraping currency controls would float China’s currency and thus bring about a fundamental shift in the global economy as capital sloshed uninhibited between China and the rest of the world, Bloomberg says.

Removing such barriers would force China’s leaders to relinquish a key means of economic control and would allow foreign investors and companies to gain greater access to the country, Bloomberg added.

However, the government isn’t expected to relinquish complete control over the capital account as the opening of China’s borders will be “step by step, to make sure the risk can be contained,” Wang Xiaoyi, deputy director of the State Administration of Foreign Exchange, said at a briefing Thursday, Bloomberg reports.

China’s goal of making the yuan a global currency — alongside the dollar and the euro — has been a key goal for the government, and the removal of capital controls is necessary to achieve that.

“After the capital account is opened, the status of China’s financial markets will be significantly elevated,” Zhou Hao, a senior economist at Commerzbank, told Bloomberg. “It will serve the authorities’ goal to make China one of Asia’s financial hubs, along with traditional centers such as Hong Kong and Singapore.”

Standard Chartered has estimated that around $1 trillion in global currency reserves will switch into Chinese assets should the IMF endorse the yuan as a reserve currency and include it in its SDR basket this year.

China’s yuan has recently emerged to become the fourth most-used currency in the world for cross-border payments in August, according to global transaction services organization SWIFT (The Society for Worldwide Interbank Financial Telecommunication).