Having jealously guarded its currency and manipulated its exchange rate to give itself the best possible environment to grow its massive export surpluses, China, it seems, is at last contemplating loosening its capital controls. A number of moves in the direction of more flexibility have already been made and significant additional moves are planned.
Steps already taken include a limited amount of local settlement in Renminbi for Hong Kong’s exchange settlement system and the introduction of a handful of Renminbi denominated Exchange Traded Funds. Both these moves provide a way for some speculative plays on the anticipated relative strength or weakness of the Renminbi. In addition, according to a Reuters report at recent high level talks between Japan and China the two countries discussed the possibility of moving from settling trade between their two countries in US dollars, to settling in Renminbi.
The talks were conducted between Japan’s Finance Minister Jun Azumi and Chinese Vice Premier Wang Qishan, and Finance Minister Xie Xuren. According to China’s official Xinhau news agency, Wang Qishan told the Japanese Finance Minister that both countries needed to “proactively study” the possibility of local currency settlement for trade and investment between themselves.
That this is was more than a vague suggestion was made plain by the fact that the two countries also agreed to cooperate closely on the issue of providing additional finance to the IMF, which is seeking new funding from senior member countries worth some $600 billion. The funds are needed to help the IMF support struggling EU peripheral states and to participate in EU bailouts....MORE