The bank has pushed forward its prediction, believing the pace of progress will be much faster than many expect. The renminbi has been convertible under the current account for 15 years, but recent steps have been taken to make the currency more convertible through the gradual liberalization of the capital account. Qu Hongbin, chief economist for Greater China at HSBC, says making the renminbi a fully convertible currency is the ultimate goal of China’s exchange-rate reform. “Policymakers now see a window of opportunity to further speed up the process, although debate over the pace of reform continues,” he says. “In our view, conditions are ripe for further action.” HSBC believes the rapid development of China’s domestic financial market has paved the way for further capital account liberalization. First, the bank says, the debt-laden big state-owned banks have been transformed into listed companies with stronger corporate governance and risk controls. Second, China’s capital market has become much more sophisticated in terms of financial instruments and investor base, with the market cap of both the equity and bond markets reaching nearly 100% of GDP. “This means the market can accommodate increased participation by foreign investors, who, in turn, will strengthen and deepen the domestic financial markets,” says Qu. “Meanwhile, the growing pool of domestic funds also points to the need for domestic investors to be able to invest more outside China.
HSBC also cites more balanced capital flows and the fact the renminbi exchange rate is much closer to its equilibrium – after appreciating by 30% against a basket of currencies since de-pegging from the dollar in 2005 – as more reasons to expect further capital account liberalization.
The increasing use of renminbi for trade settlement is also likely to speed up the process, the bank says.
HSBC expects China to further open its domestic equity market to overseas investors and to lift restriction on foreign investors participating in the domestic bond market.
It also believes there will be an increase in the quota for individual FX purchases in China, and that Beijing will grant permission for individuals to invest overseas as well as allowing foreign companies to raise renminbi on onshore capital markets.
Qu says an open capital account and renminbi convertibility does not mean a complete absence of regulation.
“It is important to distinguish between free and full convertibility,” he says. “The latter implies that regulators will continue to monitor transactions to safeguard domestic financial stability.”
Qu points out that capital controls still co-exist with capital account convertibility in certain countries, such as South Korea and Taiwan.
“China can achieve basic full RMB convertibility, while at the same time retaining appropriate capital controls to minimize risks,” he says. “Prudent controls are likely to be kept in place, possibly in the form of restrictions on speculative money inflows and short-term foreign debt.”
Restrictions on China's capital account
|Source: PBoC, HSBC|