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HKEx's Chief Exec: China to Allow Free Float of Yuan in 5 years

The exchange rates of the Chinese Yuan have been a hot topic over the past years, amid Beijing's ambitions to boost the status of the currency in the global markets and the reluctance of the People's Bank of China (PBoC) to forgive control and let the Yuan appreciate against the US dollar.  The developments of the situation are monitored closely by China's trading partners and there are plenty of forecasts about the possible floating of the Renminbi, the timing, and the scope of the process.

 
Yesterday Charles Li, Chief Executive of Hong Kong Exchanges & Clearing Ltd (HKEx), one of the world’s largest exchange owners, added his voice to the chorus of predictions about the future free float of the yuan. Speaking at a discussion at the Futures Industry Association (FIA) conference, he forecast that China would permit the totally free float of its currency within five years.
 
Keep in mind that owing to restrictions, the yuan is available for forex trading with a small number of brokers, including  Forex.comOANDASaxo BankFXDDFXall, and GFT Markets
 

Why does the central bank maintains control over the Yuan exchange rates?

 
Currently, the PBoC formally allows some appreciation of the Yuan against the US dollar, but the currency floats only within certain limits and many blame China for keeping the Yuan undervalued in order to shield exporters. The bank insists that a free float may open the doors to a sudden spike in the currency's value and will therefore make exports very expensive, creating troubles for domestic manufacturers. In addition, the free float will cut the earnings that manufacturers repatriate from abroad.
 
 

Why float the CNY?

 
Beijing has stepped up its efforts to boost the Yuan's role in the international markets, planning for it to win the status of a reserve currency, alternative to the US dollar. Having a reserve currency provides a range of benefits for the issuing country, including lower transaction costs when it comes to buying commodities.
 
And yes, there will be positive developments for the Chinese economy after a float, such as a cheaper imports (including those of crude oil) and slowing down inflation since the Renminbi will appreciate and lower amounts of the currency will be around.
 
China has made the necessary steps to expand the presence of its currency abroad: in 2009 it launched a program to use the Yuan to settle cross-border deals – a move that has boosted the proportion of trades conducted in Yuan from 1% to 9%. According to an HSBC forecast, by 2015 this number will rise to 30%. 
 
On top of this, last year China sealed a deal with Japan (a vital trading partner) for a direct exchange of Yuan and Yens, without first converting the currencies into US dollars. 
 

Fully-Fledged or Limited Float?

 
HKEx's chief was adamant when he said that the rate system had to change and would change, but many doubt that the PBoC would approve of a fully-fledged Yuan convertibility. Some analysts like Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group, predict that in five years the float will be only basically convertible, which implies some form of control by the central bank. 
 
Currently,  the daily reference rate for the Yuan is based on market makers’ quotes and the prices of spot contracts in Shanghai cannot fluctuate below or above 1% of either limit. According to a Bloomberg News survey from last November, 12 out of 20 analysts forecast expansion of the reference rate scope in 2014. The survey also says the Yuan could appreciate between 2.1% to 6.1% per dollar in 2013, compared to a 1% growth in 2012.
 
 

Where will the yuan trade be concentrated?

 
Three financial centres – Paris, Zurich and London – are competing to become the leading hub in Europe for Yuan trading. The City seems to be gaining force in this race, as the Bank of England has announced a pending currency-swap deal with the PBoC, an arrangement which paves the way for the BoE to pump about CNY 400 billion (USD 64.3bn) into UK banks. 
 
At the end of the day, the odds are certainly in favor of the Renminbi getting floated at some point in the future: so it is not a question of “if”, but of “when” and “how”. The forex stage is set for some major developments and we'll keep you posted on them.
TAGS: china  yuan  float  currency  forex trading  people's bank of china  futures industry association  exchange rate  reserve currency  inflation  imports  exports 

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