China to set up a trial zone for yuan convertibility

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China is to set up a special business zone to experiment with the yuan's convertibility, the latest step in its moves to open up its capital markets.

The Qianhai zone will be established in the southern city of Shenzhen, just across the border from Hong Kong.

Beijing has been seeking to open up its capital markets to try to trigger a fresh wave of economic growth.

It has also been pushing for a more global role for its currency.

Zhang Xiaoqiang, vice chairman of China's National Development and Reform Commission, the state planning agency, said: "The country's policy is to gradually open up its capital account and realise the full convertibility of the yuan.

"Qianhai, as the first experimental zone of the country's modern service industry, should be a pioneer of that."

The zone will now be established over the next eight years, with construction set to start in 2013.

Shenzhen is where China first introduced its key economic reforms 30 years ago.

Loosening grip

China's yuan was pegged to the US dollar until 2005, when it was allowed to float against a basket of currencies each day.

Since then, the yuan has risen nearly 30% against the dollar.

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This is a logical next step of the ongoing capital account opening and yuan internationalisation”

End Quote Wei Yao Societe Generale

Beijing has also introduced a range of reforms, indicating that it was willing to further loosen its grip on the yuan.

In April this year, it widened the range in which the yuan can fluctuate against the US dollar to 1% either side of a daily price set by the central bank. The previous limit was 0.5%.

It has also almost tripled the amount that international fund managers can invest in China to $80bn (£50bn).

Analysts said the latest move to set up a special zone to test the yuan's convertibility indicated that Beijing was keen on continuing its financial and currency reforms.

"This is a logical next step of the ongoing capital account opening and yuan internationalisation," said Wei Yao, China economist at Societe Generale in Hong Kong.

"A lot of developments this year show that China is indeed sincerely committed to reforms and opening up."

Fully convertible?

Although the exact details are yet to be announced, it is widely expected that once the special zone is established, banks in Hong Kong will be allowed to lend money to companies based in that zone.

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Currently, such financial transactions are not allowed by China.

The BBC's Hong Kong correspondent Juliana Liu said that the move was a significant step in Beijing's financial reforms.

"The idea is that if the experiment is successful, then it is possible that the yuan will be fully convertible for investment as well as business," she said.

China has been pushing the use of the yuan as an alternative to the US dollar as a global reserve currency.

Most analysts have said that the yuan needs to be fully convertible before it can be treated as a reserve currency.

However, Liu Dongmin, a senior researcher at the Chinese Academy of Social Sciences who helped to draft the plans for the special zone, said that while the step would help boost the yuan's role as an international currency, China would not rush to fully open up its capital and financial markets.

"This is something we'll only be experimenting with in Qianhai. And it is far from a full opening up of China's capital account."

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