Renminbi may never be fully liberalised, says GSAM’s O’Neill

China’s renminbi may never be a fully convertible currency, according to Jim O’Neill, chairman of Goldman Sachs Asset Management.

“[The yuan] will certainly be fully liberalised for use in trade but I am not 100% convinced we will have liberalisation, which means complete free use for everybody around the world in terms of investment speculation,” says O’Neill.

The extent of the Chinese government’s loosening of controls on renminbi depends on what happens with the economy as well as global influences, he adds.

O’Neill was speaking at a conference in London this past week.

Even if the full convertibility of renminbi may never be reached, O’Neill is encouraged by some liberalisation of the currency by the Chinese authorities. By 2015 sufficient reforms will have taken place to enable it to be included in the IMF’s special drawing rights currency basket, according to O’Neill. Such a step will have major ramifications for renminbi, including more widespread use.

The popularity of the Chinese currency has been increasing. Renminbi has risen six places in the rankings of world payment currencies since the start of 2012, putting it at number 14, according to Huabin Wang, chief corporate banking officer at Bank of China.

However, he takes a different view, saying at the same conference, “I cannot be too optimistic that renminbi will become fully convertible in three or five years but I am very confident that in the next decade cross-border renminbi utilisation will increase significantly.”

In the first quarter this year, there was a record issuance of offshore RMB-denominated bonds. The favourable yuan/US dollar swap rate meant a lot of issuers issued in renminbi offshore and swapped into US dollars.

Banks in Russia as well as Latin America and the Middle East took advantage of this. By the end of February, the second-largest country for offshore renminbi bond issuance was Russia, ahead of onshore Chinese companies issuing in the offshore market, according to Tyrell. Hong Kong remains the largest offshore market for renminbi bonds.

Although many believe liberalisation of the Chinese currency will continue, O’Neill cautions that “whatever China does with respect to exchange rate reform, it should be seen in the context of what they do in domestic financial market reform. I think policy-makers in Beijing realise there are dangers of liberalising the yuan too quickly ahead of domestic market reform, especially in the interest rate market.”

The new Chinese leadership, which took over earlier this year, is more open to change than the previous rulers. Some believe the pace of financial market reform will accelerate. Developments in the Chinese fund market since the start of 2013 have been seen as evidence of that. Changes to China’s fund laws mean hedge funds are now recognised for the first time in mainland China.


This article was first published on Risk

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