China Must Liberalize Interest-Rate Market, SLJ’s Jen Says

China needs to liberalize its interest-rate market before the yuan has a chance of becoming a reserve currency, according to Stephen Jen, a managing partner of SLJ Macro Partners LLP, a London-based hedge fund and economic research firm.

Jen, formerly the global head of currency research at Morgan Stanley, commented by e-mail following China’s decision to widen its currency’s trading band for the first time since 2007.

On interest rates:

“Perhaps the most important market that needs to be liberalized is the interest rate market. China does not yet have a yield curve that is market-determined. The liberalization of the RMB market is the flip side of liberalizing the bond markets. Both steps will need to be taken for the RMB to ever become a reserve currency.”

On politics:

“Until Beijing stops intervening in the currency markets, regardless of the variability of the RMB, the RMB will still be controlled rather than market-determined. My own guess is that Beijing is genuine in their desire to scale back interventions.”

On valuation:

“I personally think that the RMB is no longer under- valued. Wage inflation has been running at around 15 percent a year for three consecutive years. This means that, if the global economy slows, it will no longer be clear that the RMB would not depreciate against the dollar.”

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net

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