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China’s small steps towards renminbi reform

The People’s Bank of China (PBoC) deputy governor Yi Gang said that the renminbi will become a free-floating currency – adding the catch that this will only happen when China thinks the markets are right.

Reform will be market-driven

Yi Gang told a conference in New York on Monday: “We have to work on removing existing barriers to the internationalisation of the renminbi so that we can make it a freely usable currency.” According to a report in the South China Morning Post (SCMP), he added that exchange-rate reform would be “market-driven” and based on the needs of Chinese companies and households.

Cut capital outflows and corporate debt

But before the renminbi's convertibility is improved, the PBoC says that China must cut its capital outflows and reduce domestic corporate debt. The SCMP reports that the PBOC intends to :

  • cut red tape for foreign investors;
  • improve regulatory and tax transparency for foreign investors in fixed-income and equity markets;
  • provide better service for offshore renminbi transactions by offering an easier payment structure; and
  • issue more licences for foreign institutions to underwrite and settle renminbi bonds.

Analysts are sceptical that deputy governor Yi's statement signifies complete currency deregulation in the near future, noting that we are more likely to see a continuation of frequent government intervention in currency policy.

One step towards reform

The statement by the PBoC's deputy governor comes days after China took a step towards relaxing some of its capital controls, by lifting the restriction on banks processing outbound yuan payments, a restriction that was introduced in January 2017. The PBoC banned commercial lenders from processing cross-border yuan payments unless the outbound yuan matched the inbound sum at the end of the month.  

CTMfile take: As the analyst quoted in the SCMP report says, "the PBOC has talked a good game on liberalisation... but their actions have not met rhetoric". Still, this is a small step in the right direction.

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