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No rush to make yuan fully convertible
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China won't rush to make the yuan fully convertible under the capital account to prevent the country's economy from being hurt by risks of free capital flows, the nation's top currency watchdog said yesterday.

"The process will be gradual and be based on the progress of the country's economic development and financial reforms," said Hu Xiaolian, director of the State Administration of Foreign Exchange, in Shanghai.

"We won't copy the models from other countries and the convertibility requires better regulatory framework, mature market participants and more efficient macroeconomic controls," Hu said at the Lujiazui Forum.

China currently allows full convertibility of the yuan in the current account but still places restrictions in the capital account. The country has been easing limits over capital inflows and outflows in the past five years.

China allows foreign institutions to enter its stock market through a Qualified Foreign Institutional Investor program with quotas assigned to each investor. In 2006 a Qualified Domestic Institutional Investor scheme for Chinese firms to trade overseas stocks was launched.

The upcoming deregulation will follow the principle of "liberalizing first from inflows and then to outflows, first to long-term flows and then to short-term, first for institutions and then individuals," Hu noted.

The yuan has gained by about one fifth since China dropped its decade-long link to the greenback and shifted to a basket of currencies, including Korean won and Japanese yen, in July 2005. In April, the yuan cracked the psychologically important seven-to-one barrier against the greenback for the first time after picking up the clip of appreciation since last October. It is allowed to trade by up to 0.5 percent against the US dollar either side of the so-called central parity rate set by the central bank daily.

Experts told the forum that the yuan's rise was beneficial to China's economy by curbing trade surplus and reducing liquidity. But they believe the currency's trading mechanism should be improved to reflect more market forces.

"The central bank should adjust the weightings of different currencies in the basket from time to time and raise the daily trading band," said Zhu Min, executive vice president of Bank of China.

(Shanghai Daily May 10, 2008)

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