China’s currency controls: Zone of contention

FINANCIAL reform is coming to China. The country’s leadership has made clear through recent pronouncements that it intends to liberalise the country’s capital account and take other measures to increase the role of market forces in the financial system. That has set off a flurry of speculation about how quickly interest rates on bank deposits might be set free and the yuan made fully convertible. The answer, it seems, is not very quickly. On December 2nd the People’s Bank of China (PBOC), the country’s central bank, issued a set of guidelines on how financial reform will proceed inside the new Shanghai Free Trade Zone (SFTZ). This 29 sq km enclave, created in September, has been trumpeted by Li Keqiang, the country’s prime minister, as a driver of economic reform under his newish administration, albeit with scant detail until now. To boost cross-border investment and trade, the PBOC wants to allow some firms and individuals to open special accounts that will allow them to trade freely with foreign accounts in any currency. A few foreign institutional investors may be allowed to invest directly in the Shanghai stockmarket. And interest rates may be liberalised for certain accounts at designated firms inside the SFTZ. What does this add up to? Louis Kuijs of RBS, a British bank, believes the pronouncement belies the hope that the borders of the SFTZ would be porous enough to…

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