Non-convertible currencies, as the name implies, are currencies that cannot be readily exchanged for another currency, generally as a result of government restrictions. The Chinese yuan (CNY) is a well known non-convertible currency. The Chinese authorities do not allow convertibility, in part, as a means to facilitate the managed exchange rate of the yuan (the currency peg).
The Renminbi is not fully convertible. How does this affect business Foreign Investment in China?
Because the Renminbi is not yet fully convertible, restrictions apply to the exchange for so-called capital account items, such as loans and contributions to share capital in an enterprise. Foreign Exchange for Current Account items and profits to be distributed to foreign investors are both fully convertible. No approval by the State Administration of Foreign Exchange (SAFE) is required for the acquisition and transfer of foreign exchange to settle debts based on legal transactions that are classified as Current Account Items. However, the banks authorized to handle such matters are charged with reviewing the documents to be submitted.
Capital Accounts, in contrast, are still subject to SAFE approval. Items include, for example, contributions to the share capital of Foreign Funded Enterprises and also foreign exchange loans. The procedures on foreign exchange, especially that related to current account items, have been relaxed in the last several years. Still, foreign businesses must take care that they obtain and keep relevant documentation on business transactions.
This is a July 27, 2021 article.
China’s renminbi needs convertibility to internationalize
Chinese currency as a full reserve currency will only happen when confidence in its convertibility is sufficient to convince unofficial (private) investors to hold much more reserves denominated in it
- Jul 27, 2021 7:38 AM EDT
Last week, the Official Monetary and Financial Institutions Forum (OMFIF) released its eighth annual report on Global Public Investors (GPI). It included a survey on asset allocation plans by reserve managers of central banks, sovereign wealth funds, and public pension funds. Together, the 102 investors responding the survey manage US$42.7 trillion in assets (Figure 1).
The survey revealed important changes in the composition of portfolios planned by global public investors. About 18% of respondents said they intended to reduce their holdings in euros over the next 12 to 24 months, while 20% said this with respect to the dollar.
Twenty years ago, the dollar represented 71% of reserve assets, whereas today it corresponds to 59%. The presence of the euro increased from 18% to 21% in the same period. Such changes have come smoothly, progressively, and orderly over the past 20 years, noted Jean-Claude Trichet, former president of the European Central Bank, during the report’s launch.
One notable shift shown by the survey appears in the Chinese Renminbi set to become a more significant part of the global financial system as central banks add the Chinese currency to their reserve assets. About 30% of central banks plan to increase their allocations to Renminbi in the next 12-24 months, compared with just 10% in last year’s report, while 70% said they intended to do it in the long term.
Central banks in all regions will be net buyers of Chinese bonds over the medium term, especially in Africa, where nearly half plan to increase their reserves in Renminbi. Asian assets in general are in high demand, with 40% of global public investors hoping to increase their exposure to the region (Figure 2).
However, the starting point for the participation of the Renminbi in the composition of reserve assets is still low, at only 2.5%, showing how its inflection point as an international reserve currency remains somewhat distant.
“The problem remains that the renminbi is not yet fully convertible. When the renminbi becomes fully convertible, I expect a big jump ahead. This is the view of Chinese friends, including the former governor of the central bank, Zhou Xiaochuan, who called for complete liberalization of the renminbi. That time will come. And when it comes, you will see the full realization [of what the OMFIF survey suggests].”
The point is that, while commercial transactions and reserves of central banks and other global public investors could strengthen the position of the Renminbi as an alternative currency to the dollar, euro, yen and pound sterling, the qualitative leap towards the internationalization of the Chinese currency as a full reserve currency will only happen when confidence in its convertibility is sufficient to convince unofficial (private) investors to hold much more reserves denominated in it.
Read the whole article here:
Why China’s Currency Tangos With The USD
Updated August 05, 2019
China’s Currency Policy
A cornerstone of China’s economic policy is managing the yuan exchange rate to benefit its exports. China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead it pegs its currency, the yuan (or renminbi), to the U.S. dollar. The yuan was pegged to the greenback at 8.28 to the dollar for more than a decade starting in 1994. It was only in July 2005, because of pressure from China’s major trading partners, that the yuan was permitted to appreciate by 2.1% against the dollar, and was also moved to a “managed float” system against a basket of major currencies that included the U.S. dollar. Over the next three years, the yuan was allowed to appreciate by about 21% to a level of 6.83 to the dollar. In July 2008, China halted the yuan’s appreciation as worldwide demand for Chinese products slumped due to the global financial crisis . In June 2010, China resumed its policy of gradually moving the yuan up, and by December 2013, the currency had cumulatively appreciated by about 12% to 6.11.
The true value of the yuan is difficult to ascertain, and although various studies over the years suggest a wide range of undervaluation – from as low as 3% to as high as 50% – the general agreement is that the currency is substantially undervalued. By keeping the yuan at artificially low levels, China makes its exports more competitive in the global marketplace. China achieves this by pegging the yuan to the U.S. dollar at a daily reference rate set by the People’s Bank of China (PBOC) and allowing the currency to fluctuate within a fixed band (set at 1% as of January 2014) on either side of the reference rate. Because the yuan would appreciate significantly against the greenback if it were allowed to float freely, China caps its rise by buying dollars and selling yuan. This relentless dollar accumulation led to China’s foreign exchange reserves growing to a record $3.82 trillion by the fourth quarter of 2013.