MNI INTERVIEW2: China Capital Account Seen Mostly Free By 2025

China's capital account should be largely convertible by 2025, with less intervention in the yuan exchange rate and only limited restrictions retained in order to safeguard financial stability, a former member of the People's Bank of China's monetary policy committee told MNI.

Controls on interest rates, fund allocation and cross border capital flows should be reduced as China also pursues a policy of promoting international use of the yuan, Huang Yiping, now deputy dean of National School of Development at Peking University and still a prominent policy advisor, said in an interview.

The PBOC is already cautious of direct intervention in the currency's managed float, and has indicated tolerance for a wider trading band, particularly for yuan appreciation. While it is not possible to say it will never intervene again, Huang said the policy preference for a weaker yuan is gradually shifting as the financial sector and capital markets become more prominent in what has long been an export-oriented economy.

A stronger currency would benefit China, he said, although this shift is only at an early stage.

PROS AND CONS

A more flexible stance on foreign exchange policy will also be positive for yuan internationalisation. More steps are likely in coming years to encourage investors to hold yuan-denominated stocks and bonds, Huang said, adding that while authorities may loosen regulations on capital flows, some restrictions will continue to be required to guard against risks to financial stability.

Moves already under way to liberalise China's markets and state-owned companies will not only be positive in themselves but should also help as China reengages with the U.S. under President Joe Biden, Huang said.

A more conventional U.S. administration will have pros and cons for China. While its behavior may be more predictable, it is also likely to seek to gather its allies to confront Beijing.

"It seems the Biden government will continue some of the policies adopted by the previous administration," Huang said, noting that the Phase One U.S.-China trade deal signed under President Donald Trump is still valid and that Biden has shown little sign of wanting to quickly reduce tariffs on Chinese goods. But the two countries can work together in areas such as WTO reform and climate change.

Negotiations for a more ambitious Phase Two trade deal are unlikely to start this year, given China's place in Biden's priorities, Huang said, adding that while he is now less optimistic of a big improvement in bilateral relations, he expects communications to be more fluid.