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Yuan’s Convertibility “Next Step” for China’s Economic Reform

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 over the next decade.

“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 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.
Market Forces

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.
Government Intervention

The new leadership will probably unveil market-oriented changes in late 2013 after a plenary session of the party’s central committee, he 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 at a separate conference 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.

Via – Bloomberg [1]

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