China's Five-Year Yuan Convertibility Plan Revealed

by Mary Swire, LawAndTax-News.com, Hong Kong

21 January 2011

In a statement, Yi Gang, Director of the State Administration of Foreign Exchange (SAFE) and Deputy Governor of the People's Bank of China (PBoC), has disclosed that the Chinese government has a medium-term strategy for the globalization of the Chinese currency.

He said that the SAFE’s objective is to achieve the capital account convertibility of the yuan on a progressive basis over the period of China’s current five-year plan. It is hoped that the programme will also boost the use of the yuan in Chinese trade and investment, as well as the development of its foreign exchange market.

In addition, Yi also said the SAFE, over the same period, would continue to maintain a policy of controlling hot money inflows into China, which are attracted by a forecasted continual appreciation of the yuan.

While cross-border trade settlement in yuan continues to be allowed to expand and deepen, the PBoC recently announced, as part of its strategy, the introduction of a pilot scheme for Chinese enterprises to settle overseas direct investments, such as new ventures, acquisitions and the purchases of stakes in overseas companies, in yuan. There has been no limit set on the overall amount of those investments.

One territory that stands to benefit more than most from the easing of these restrictions is Hong Kong, which has long been the prominent platform for mainland China's outward direct investments. In 2008 and 2009, Mainland’s outward direct investments amounted to USD55.9bn and USD56.5bn respectively, of which around 65% was invested in Hong Kong or through Hong Kong to other parts of the world.

Upon implementation of the pilot scheme, it added that Mainland enterprises can conduct such investments through Hong Kong’s offshore RMB centre and, at the same time, make use of the multi-currency and multi-functional financial platform in Hong Kong for the related financing and fund management activities.

The Chief Executive of the HKMA, Norman Chan, said: “The launch of the pilot scheme for the settlement of overseas direct investments in RMB will further enhance the circulation of RMB funds for trade and investment activities. This will be conducive to the development of Hong Kong's offshore RMB market, particularly in supporting real economic activities conducted in RMB and thereby playing an active role in the greater use of RMB outside the Mainland.”

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