WESTPAC is boldly forecasting in a new report a short march to global dominance for the Chinese currency, the yuan.
Vina Cheung, HSBC’s global head of yuan internationalisation, said yesterday that she was confident that, with the Chinese government “demonstrating strong competence” in managing the process for more than a decade, the yuan — also known as the renminbi — is heading steadily towards becoming an international reserve currency.
Westpac expects that by 2020, China will:
• Free the capital account, which is not convertible, compared with the current account in which the yuan has been convertible for trade use for 18 years. Almost four years ago, the State Administration of Foreign Exchange said the yuan would be fully convertible within five years.
• Liberalise interest rates, which remain controlled by the People’s Bank of China, severely limiting the scope for competition within the finance sector as well as investment options.
• Converge the onshore CNY and the offshore CNH yuan markets — the latter originally focused on Hong Kong — allowing trade within a broader band.
• Place the yuan on an even footing with other global currencies.
• Make significant progress towards establishing Shanghai — now containing a free-trade zone in Pudong — as an international finance centre, by making the currency fully convertible and freeing interest rates, though progress is also considered necessary by some observers towards the free flow of information and an independent legal system whose judgments are implemented.
• See the yuan join the US dollar as an international reserve currency. Ms Cheung said HSBC believed China would achieve full convertibility even sooner, by 2017, “though there is some debate” about what that comprises.
The process of yuan internationalisation was picking up momentum, she said, with a surge usually following the establishment of settlement hubs.
The People’s Bank of China is expected to announce soon the clearing bank for the Sydney hub.
But China was taking “a very controlled and careful” approach towards interest rate liberalisation, she said. “I don’t foresee it in the very near future”, she said, because of its impact on local capital market activity and the financial markets as a whole.
The Westpac report said Australia was “now at a positive tipping point in its relationship with China, as the number of touch points … reach every element of its economy”.
Direct conversion, the bank said, would create savings especially for those who traded in commodities for which the US dollar remains the currency of choice, requiring a three-way conversion with a loss of basis points at each conversion point.
“And as the Chinese economy continues to open, Australian savers will benefit from direct access to Chinese asset markets, and Australia’s funds management industry will benefit from the ability to service more Chinese savers,” it said.
The report said: “Chinese investors may well emerge as major providers of capital to Australian business”, with foreign direct investment and banking assets comprising a much larger proportion of China’s foreign assets, with 70 per cent currently held in foreign exchange reserves.
It said that with the establishment of a Sydney settlement hub for yuan trade — joining London, Frankfurt, Seoul, Hong Kong, Singapore, Macau and Taipei — Australia “is well positioned to realise benefits from the increasing flow of trade, capital and people”.