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Global renminbi trade platform not a substitute for capital account liberalisation

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The People’s Bank of China’s (PBoC) decision to launch a new cross-border payment system that facilitates greater use of the Chinese currency in international trade and investment is widely welcomed by the market, but experts believe that more loosening steps are needed, according to Asiamoney.

According to the PBoC, the China International Payment System (CIPS) will likely be operational in a year or two and will process cross-border renminbi payments used in trade, investment and other purposes. "The development of a cross border payment system to facilitate an improved infrastructure will certainly add to increase the renminbi payment volumes internationally," said Frank Hamer, head of global transaction services for China at RBS to Asiamoney PLUS in an email reply on April 12. "It will further enable reduced manual documentary requirements for cross border transactions and is a further indication of a rapid expansion of the internationalisation of the renminbi." The new system is designed to make payments denominated in the Chinese currency safer, stable and more efficient and will help the government achieve its goal of making the currency convertible under capital account, according to the central bank’s statement. Despite this positive development, market participants still believe there is a long way to go before renminbi will be actively used in trade settlement globally. "The biggest obstacle at the moment is China’s capital control. If the control still remains, there will limited use of the renminbi outside China’s border," said Li-Gang Liu, head of Greater China economic research at ANZ to Asiamoney PLUS on April 12. "Once capital control is removed, the risk of repatriating the currency back to China will no longer be there and will increase or enhance the role of renminbi naturally." "I don’t think it is a very big move that will change major issues. The infrastructure is helpful for future development but we need more measures to liberalise the capital accounts," said Zhiwei Zhang, chief China economist for Asia ex-Japan at Nomura to Asiamoney PLUS on April 12. "Capital controls are still very much in place those are the bottlenecks." Recent capital account liberalisation measures include the China Securities Regulatory Commission (CSRC) announced on April 3 that it would substantially expand quotas for both US dollar and renminbi qualified foreign institutional investor schemes (QFII) from US$30 billion to US$80 billion and from Rmb20 billion (US$3.2 billion) to Rmb50 billion respectively. In addition, the residents of Wenzhou – a city plagued by underground lending – will be allowed to invest overseas and make private investments in local financial institutions. Under the investment proposal, residents will be allowed to spend up to US$200 million a year – or as much as US$3 million per person – to set up, acquire or invest in nonfinancial companies in foreign markets. As previously reported by Asiamoney PLUS, around 9% or Rmb2 trillion of China’s global trades with the rest of the world – Hong Kong included – were transacted in the Chinese currency in 2011. HSBC predicts trades conducted in renminbi will surge six-fold to US$2 trillion by 2015, representing a third to half of a nation’s trade volume.