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.”
“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.”
“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.”