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Foreign Exchange

RMB will continue to appreciate; could be convertible by 2015, says Barclays

A leading Barclays emerging market economist believes the Chinese renminbi is likely to appreciate due to China’s strong economic growth, and could reach “basic convertibility” by 2015, according to Asiamoney, a sister publication of EuromoneyFXNews.

Yiping Huang, chief economist of emerging Asia for Barclays – speaking at the Euromoney Conferences’ Global Offshore RMB Funding Forum 2012 in Hong Kong – says the renminbi could continue to appreciate further on the back of China’s economic strength. “On a long-term outlook, the currency has significant potential to continue rising,” says Huang. “Globally, if a country’s GDP is growing faster than the world average by one percentage point, this leads its currency to typically increase by at least half a percentage point.”

Chinese authorities are targeting 7.5% GDP growth this year and analysts expect its economy to expand by up to 8.3%. Meanwhile, the global economy is predicted to grow by 3.5%, according to the International Monetary Fund (IMF), which would suggest sizeable, continued appreciation potential for the renminbi.

China’s currency has appreciated from Rmb6.82 against the US dollar on January 1, 2010, to Rmb6.31 on the week of May 23, a rise of 7.4%.

Huang also feels that Beijing could seek to conduct a “basic convertibility” of its currency by 2015, because this is the year the IMF decides on the weighting of its special drawing rights (SDRs).

SDRs act as an artificial form of currency that serve as the official currency for several international organizations. Their value is based upon an underlying basket of several internationally used currencies.

SDRs are important because they can be used to settle trade balances between countries and be used to pay the IMF. If the renminbi were to become part of the basket of currencies used to value SDRs, it would entirely legitimize its global usage.

“If China and the US are serious about adding the renminbi to the SDR basket [something the US has said it would support] then reform must accelerate as the next basket will be decided in 2015,” says Huang. “The renminbi will need to meet the necessary requirements, which is basically that the currency is broadly used for international settlement of trade and financial activities. It basically needs to be convertible.

“So the renminbi may become convertible faster than many expect. China is aiming for basic convertibility [by 2015].”

Huang says basic convertibility would require three key steps: outward direct investment; debt financing; and portfolio investment.

“The authorities look willing to ease the first two, with cross-border capital flows rising,” he says. “Basic convertibility also implies increasing convergence of the interest rate and exchange rate [of the onshore renminbi and offshore renminbi].”

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