リンク: Bloomberg.com: Asia.
China to Start Yuan Convertibility Trial in Tianjin (Update2)
By Lee Spears and Jake Lee
Sept. 13 (Bloomberg) -- China will allow investors in the northern city of Tianjin greater freedom to buy and sell currencies as part of moves towards a fully convertible yuan.
China's State Administration of Foreign Exchange has approved Tianjin's plan for ``limited convertibility'' of the yuan at the Binhai economic area, the city's mayor Dai Xianglong said at a conference in Xianghe, outside Beijing. Tianjin will adopt a ``floating foreign exchange mechanism,'' he said.
The comments by Dai, a former governor of the People's Bank of China, add to signs that the government will use a more flexible exchange-rate to cool the world's fastest-growing major economy. A senior Chinese legislator today said 2008 may be ``the right time'' to allow full convertibility of the currency.
``China's reforms are always gradualist and now we're seeing a pilot program along the road of yuan reforms,'' said Wang Qing, head of China strategy at Bank of America in Hong Kong. ``They're creating an experiment in a physical environment that shows they're on the direction of moving the yuan to be convertible.''
Since ending a peg to the dollar on July 21, 2005, China's central bank has allowed the yuan to rise about 2 percent. The People's Bank of China's ability to control the market would be reduced were the yuan more widely convertible. The currency can now only be bought or sold for foreign trade purposes or to fund approved capital investment projects.
``The ultimate goal is to make the yuan fully convertible,'' Cheng Siwei, the vice chairman of the Standing Committee of the National People's Congress, China's parliament, said at the forum. China's cabinet plays a greater role in setting currency policy than its parliament.
A more flexible yuan will help the central bank use its ``monetary policy instruments more effectively,'' the International Monetary Fund said Sept. 11. The fund is meeting this week and next in Singapore. The Group of Seven nations, which told China in April to let the yuan appreciate, also meets this week in Singapore.
U.S. Treasury Secretary Henry Paulson may use a speech today to pressure China to allow faster currency gains to curb its exports and help cut the U.S. trade deficit. Paulson will speak at the Treasury Department at 11 a.m. New York time.
Since ending the currency's peg, the central bank has allowed it to float with reference to a basket of currencies including the euro, yen and South Korea's won. It is not allowed to fluctuate more than 0.3 percent against the dollar from a rate set daily by the central bank.
The China Securities Journal said today China may widen the yuan's trading band, citing experts it did not name. Larger fluctuations would discourage inflows by increasing the risk for speculators, according to the Journal, affiliated with state-run news agency Xinhua.
The People's Bank of China, the country's central bank, said it has no plans to release any statement on a widening of the trading band for the yuan
``We have no press releases or statements for the moment,'' said an spokeswomen in Beijing, who declined to be identified.
The yuan weakened 0.03 percent to 7.9486 against the dollar as of 5:30 p.m. in Shanghai, according to the Web site of the China Foreign Exchange Trade System.
``There's a consensus that Asia including China will perhaps need to do more in order to address the trade imbalances and the global imbalances,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong.
The Binhai zone in Tianjin is replicating the financial services pioneered by Shanghai's Pudong financial district and Beijing's Finance Street area to attract overseas companies including HSBC Holdings Plc. Under World Trade Organization rules, China must let overseas lenders tap the nation's $1.9 trillion in savings through lending and taking deposits in the local currency by Jan. 1.
China Construction Bank Corp., the nation's fourth-largest lender, said it's been invited to take part in Binhai's trial relaxation of currency controls, the bank's chairman Guo Shuqing said in a Sept. 11 interview.
Companies will be granted ``preferential treatment'' to exchange ``small amounts'' of local currency into U.S. dollars for investment purposes, Guo said. The program will be extended to individuals later, he said, without giving a timetable.
The city will also adopt a ``floating foreign exchange management mechanism'' that is ``determined by market supply but regulated,'' Dai said, without giving details.
To contact the reporter on this story: Lee Spears in Beijing at
Last Updated: September 13, 2006 06:27 EDT