China Capital Controls to be Lifted Fairly Soon

In just ten years, by 2024, the renminbi will become a significant global reserve currency, with yuan-denominated government securities likely to emerge as the main alternative to US Treasuries as a global “safe asset,” a comprehensive study by a government-backed Australian think tank has concluded.
 
The 125-page report by the Centre for International Finance and Regulation (CIFR), which includes in-depth analysis of China’s financial landscape and interviews with more than a hundred Chinese enterprises, also concludes that capital controls will be largely or completely completed in the near-to-medium term and that borrowing and lending rates and the exchange rate will be market-determined. 
 
There will be winners and losers, says co-author Geoff Weir, an economist and former hedge fund and fixed income fund manager who is now a CIFR research fellow. “For example, markets that are already centers of offshore RMB expertise will experience strong growth in RMB-related financial flows and activity.”
 
“On the flip side, as Chinese financial assets become major components of global equity and fixed income benchmark indices, they will do so at the expense of the assets of other countries – in particular developed economies. Currencies and asset classes such as the Australian dollar and Australian resource stocks, which are used as 'proxy' trades to express views on China, will lose popularity.”
 
Co-author Kathleen Walsh, who is Associate Professor of Finance at the Australian National University, says RMB trade invoicing offers many benefits for parties on both sides. But some constraints in both China and its trading  partners identified in the report will need to be overcome.
 
“The costs of hedging foreign exchange risks would appear to be significantly higher in China than in many offshore financial centers, reflecting the greater liquidity and interbank connections offshore,” Dr. Walsh notes. “This suggests that both parties can potentially benefit from RMB trade invoicing, but many markets have constraints that will need to be removed in order to reap the full benefits of greater RMB trade invoicing.”
 
Key insights from the report include:
 
  • RMB likely to become a major trade invoicing and settlement currency with implications for trade financing; FX markets and derivatives markets.
 
  • Chinese equity market likely to become the largest in the world within a decade, with a forecast market capitalization of around US$30 trillion or almost 25% of projected world equity market capitalization compared to a projected US$22 trillion (18%) for the US.
 
  • Chinese bond markets likely to become the second biggest in the world.
 
  • Capital inflows will surge as China becomes a core component of benchmark indices, as will capital outflows as Chinese domestic portfolios diversify.
 
  • RMB to be a significant global reserve currency, with RMB-denominated government securities likely to become the main alternative 'safe asset' to US Treasuries. This dual reserve asset future is projected to have a stabilising influence on global markets. 

 

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