End of Chinese Capital Controls

China wants the Yuan to be included in the International Monetary Fund’s basket of reserve currencies. This is part the plan for the Yuan to be internationalized. However, the Yuan does not trade freely with other currencies. In this regard, China plans the end of capital controls by 2020 according to a report in Bloomberg Business.

China’s leaders are poised to announce a 2020 deadline to dismantle currency controls that have kept the world’s second-largest economy from fully integrating with global financial markets.

At a gathering next week, top officials in the Communist Party will discuss pledging to “make the yuan convertible under the capital account,” according to a person familiar with talks now under way. The promise would be codified in a document charting the country’s economic course through to 2020, known as the 13th Five Year Plan. The current document only offers an open-ended commitment to “speed up” such reforms.

A true end of Chinese capital controls would hugely elevate China’s financial markets making it a trading hub similar to Hong Kong and Singapore and perhaps eventually similar to Tokyo, London and New York. But, the Chinese leadership may see risks along the way so that the end of Chinese capital controls may not come as soon as promised.

If and When

There are many who will take the announcement of an end of Chinese capital controls with a grain of salt. The first and foremost goal of the Communist Chinese leadership is to remain in charge. All other goals are secondary. Thus China announces one plan and then then executes another, much to the concern of investors and currency traders. The New York Times publishes complaints of discordant financial messages from China.

Growth is slipping. The latest data on Monday showed that the economy grew at 6.9 percent in the third quarter, its lowest level since 2009. And Beijing is scrambling to respond to the pressures.

While President Xi Jinping says the country is committed to financial reform, the resulting measures send the message that China is backpedaling on those efforts. It is a new and shifting landscape that is proving difficult for the rest of the world to navigate.

It is all complicated by the competition and the lack of coordination among the many agencies charged with managing China’s economy. The central bank, securities regulator, Finance Ministry and economic planning agency, among others, have different agendas and goals.

The collective result is that it is difficult to discern exactly what is happening in China. From the outside, officials appear to be changing course on long-held reform plans that are broadly considered critical for the health of the economy.

Everyone can make mistakes and that includes leaders of nations. But the things to remember with China are that:

  • they do not have to run for re-election,
  • they benefit greatly by remaining in charge
  • and they fear the kind of social unrest that would lead to a change in government.

The end of capital controls will happen when it benefits China and its leadership.

Trading the Yuan

Currently trading the Yuan takes place in one market in China and another outside of the country. And China has strong currency controls so that the Yuan does not float freely. This makes trading the Yuan difficult. If and when the end of Chinese capital controls happens it could be a profitable experience for those who make their money due to the fluctuations in foreign currency rates.