China moving to more convertible yuan

BEIJING: China central bank governor argued in comments published on Saturday that Beijing does not control the yuan's flow across borders as tightly as some think and that it is natural for the currency's trading band to be widened over time.

Zhou Xiaochuan said in an interview with Chinese magazine Caixin that China did not fare badly on an International Monetary Fund measure of currencies' convertibility under the capital account. But he stopped short of calling for a fully convertible currency.

"If the highest standard of measurement is to have wholly unrestricted convertibility, then so many developed countries have not achieved 100 percent full convertibility," Zhou told the magazine. Investors increasingly expect that China will give them more freedom to trade the tightly controlled yuan.

While the currency is already convertible under China's current account, the broadest measure of trade in goods and services, the capital account, which measures inflows and outflows of different types of capital, is still closely managed by Beijing as it worries about capital flight and hot money inflows.

Countries with convertible currencies under their capital account let their currencies trade with few restrictions for investment purposes.

Zhou noted China must regulate levels of foreign debt incurred by private and public sectors to reduce currency risks, monitor cross-border deals to guard against illegal activities such as money laundering, and combat speculative capital flows.

"Excluding the above three factors and judging from the 40 sub-items set by the IMF, you may find that actually China is not that far from capital account convertibility," Zhou said.

Still, he said Beijing would keep improving the exchange rate regime to make it more flexible, adding it is natural for the currency to fluctuate in a bigger trading band in future. "The yuan's trading band will be widened," he said.

China currently lets the yuan trade in a 0.5 percent range, and moves to increase that band would show Beijing is gradually relaxing its control over the currency. "Compared with international markets, you may know that the 0.5 percent (daily trading band) is quite a small floating band," Zhou said.