As the flexibility of the yuan increases in the coming five years, China will have more market-determined interest rates and will further open up its capital account, Li said at a forum in Washington.
If reforms go on smoothly, “the renminbi will be fully convertible in five years,” he said, referring to the Chinese currency.
China has accelerated the use of the yuan in international trade and investment to curb its reliance on the dollar. A fully convertible currency - so the yuan can be exchanged with other currencies without restrictions - is one of the criteria the U.S. and Europe are demanding from China as a condition for allowing it to be part of the International Monetary Fund’s currency basket.
Fifty-seven percent of 1,263 global investors, including 58 percent of Asian respondents, said it’s likely the yuan will be convertible in five years, according to a Bloomberg survey published in May. Nineteen percent of respondents said it will become a global reserve currency in that time, with an additional 31 percent predicting that step within a decade.
China “has no defined timetable for the yuan to be fully convertible,” Central Bank Governor Zhou Xiaochuan said earlier this month in London. “It will be a gradual process,” Zhou said.
China’s yuan has strengthened 3.4 percent against the dollar this year, the best performance among 25 emerging-market currencies tracked by Bloomberg. Chinese policy makers said they would allow more flexibility in the exchange rate last June, after keeping it little changed from July 2008 to help exporters weather a global financial crisis.
If the yuan appreciates “sharply,” it will attract huge funds from U.S. and Europe, destabilizing the U.S. economy, Li said today.
The U.S. dollar needs to be kept “reasonably stable” in the coming few years, Li added. “It serves nobody’s interest to see a volatile dollar.”
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