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China’s next step in Yuan overhaul is convertibility, PBOC head Zhou says

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The People´s Bank of China´s next step in overhauling the exchange-rate system will focus on convertibility, Governor Zhou Xiaochuan said, as his omission from a top Communist Party committee indicated he will retire.
“For the central bank, I think the next movement related to the yuan is going to be reform of convertibility,” Zhou told the annual meeting of International Financial Forum, an advisory organization, in Beijing the day before yesterday. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.”
The governor´s comments underscore pledges made by the ruling Communist Party during a once-a-decade power transition last week to promote freer movement of capital in and out of the country for investment purposes and to make the exchange rate more market based. China is seeking to boost the use of the yuan in international trade and finance to reduce the U.S. dollar´s global dominance and curb its own reliance on the currency of the world´s biggest economy.
Zhou, who has headed China´s central bank for the past decade, wasn´t named to the new central committee of the Communist Party last Wednesday, suggesting he will probably leave his job. At a press briefing last Sunday, Zhou didn´t directly answer a question on retirement. Possible replacements include Shang Fulin, head of China’s banking regulator; Guo Shuqing, chief securities regulator; Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing; and Bank of China Ltd. Chairman Xiao Gang, according to David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department and now an Asia analyst in Los Angeles at TCW Group Inc.
During Zhou’s tenure, the country started to overhaul its exchange-rate system and financial markets. Changes included revaluing the yuan and ending its peg to the U.S. dollar in 2005, allowing the currency to become convertible for trade purposes, giving banks more freedom to set interest rates and allowing some foreign institutional investors access to the country’s stock and bond markets.
The yuan has appreciated about 33 percent against the dollar since the revaluation. The currency had its biggest weekly gain in a month, closing at 6.2356 per dollar in Shanghai on Friday.
HSBC Holdings Plc analysts led by Qu Hongbin, the chief economist for China, said in a report this month that the new leadership may liberalize interest rates and push to make the yuan fully convertible within five years as part of an overhaul that will “revolutionize the country’s financial system.”

Bloomberg

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