China’s Next Step on Yuan Is Convertibility, Zhou Says
China’s central bank governor said convertibility will be the next step in the overhaul of the exchange-rate system as calls grow for the nation’s new leadership to deepen changes in the economy to sustain growth.
“For the central bank, I think the next movement related to the yuan is going to be reform of convertibility,” Zhou Xiaochuan said at a conference in Beijing on Nov. 17. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.”
Zhou’s comments underscore pledges by the ruling Communist Party, which last week completed the most important phase of a once-a-decade power transition, to promote freer movement of capital in and out of the country for investment purposes and to make the exchange rate more market-based. The reforms may be part of a broader sweep of changes the nation’s new leadership, headed by Xi Jinping, will be pressured to roll out in the world’s second-biggest economy.
“Expectations are high” for change as government intervention, ranging from excessive regulation to rigid price controls, has become “unbearable” over the last couple of years, said Li Jiange, head of the country’s biggest investment bank and a vice chairman at the government-run company that holds stakes in state-owned lenders.
Li, who spoke at a separate conference in Beijing on Nov. 17, is chairman of China International Capital Corp., and a vice chairman of Central Huijin Investment Co., a unit of the nation’s sovereign wealth fund.
He added his voice to calls this month by billionaire entrepreneur Liang Wengen, economist Justin Lin Yifu and liberals including the son of late party chief Hu Yaobang for the government to allow a bigger role for market forces.
Liang, head of Sany Heavy Industry Co., the nation’s biggest machinery maker, said private entrepreneurs “hope the new generation of leaders will continue to reform and open the market.” He spoke on Nov. 11 as a delegate to the congress that selected the party’s new ruling body last week.
CICC’s Li said opponents of market-oriented changes gained a louder voice during the global financial crisis when the government’s intervention in the economy increased and intensified.
“We need to review what the Chinese Communist Party decided 20 years ago: that is, to let market forces play a fundamental role in allocating resources,” he said.
The new leadership will probably unveil market-oriented changes in late 2013 after a plenary session of the party’s central committee, Li said. Reforms will focus on reducing government intervention in the economy and breaking up state monopolies, he said.
The PBOC is often pressured by interest groups to relax monetary policy and to support growth, Zhou said in a separate talk on Nov. 17.
Zhou, who has headed China’s central bank for the past decade, wasn’t reappointed to the central committee on Nov. 14, suggesting he will probably leave his job. At a press briefing during the congress, Zhou didn’t directly answer a question on his retirement.
During his tenure, the country started to overhaul its exchange-rate system and financial markets. Changes included revaluing the yuan and ending its peg to the U.S. dollar in 2005, allowing the currency to become convertible for trade purposes, giving banks more freedom to set interest rates and allowing some foreign institutional investors access to the country’s stock and bond markets.
The yuan has appreciated about 33 percent against the dollar since the revaluation. The currency had its biggest weekly gain in a month in the five days through Nov. 16. It was little changed today at 6.2345 per dollar at 11:38 a.m. in Shanghai.
China’s financial system is dominated by large state-owned banks and the stock market and favors big “capital-intensive” players, said Lin, who is a professor at Peking University’s China Center for Economic Research. China must develop small, local banks to serve rural areas and small businesses, he said.
Lin was at the World Bank when it published a 448-page report in February titled China 2030, which outlined policies to help the nation sustain growth while avoiding the so-called middle-income trap, where expansion slows because of a failure to implement reforms needed to create a wealthy middle class.
Co-written with the Development Research Center, a body that advises the State Council, China’s cabinet, the document highlighted the need to overhaul state-owned companies, banks, land, labor and financial markets, promote competition and reduce the role of government.
The report was endorsed by Li Keqiang, according to Ding Shuang, senior economist for China at Citigroup Inc. in Hong Kong who previously worked for China’s central bank. Li was made No. 2 in the party hierarchy in last week’s power transition and is set to become premier in March when Xi is appointed president.
Xi and Li are inheriting an economy burdened by slower growth, an aging population, widening income disparity and environmental degradation that’s fueling social unrest.
They may face economic expansion of 7 percent in 2013, the slowest in 23 years, according to Pacific Investment Management Co., which runs the world’s largest bond fund. Standard Chartered Plc sees a risk of annual expansion slumping to between 3 percent and 4 percent within 10 to 15 years without market-driven change to introduce more competition for state enterprises.
Growth this year may slide to 7.7 percent, according to the median estimate of economists surveyed by Bloomberg News from Oct. 18-22. That would be the slowest pace since 1999 and down from an annual average pace of 10.6 percent in the decade through 2011.
--Zhou Xin. Editors: Nerys Avery, Scott Lanman
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