China Plans 2020 Deadline for Dismantling Capital Controls

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A man carries a kite in the shape of the Chinese national flag in Shanghai.

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  • Proposal may expand committment to invest abroad, person says
  • 5-year plan to be debated next week at Communist Party plenum

China’s leaders are poised to announce a 2020 deadline to dismantle currency controls that have kept the world’s second-largest economy from fully integrating with global financial markets.

At a gathering next week, top officials in the Communist Party will discuss pledging to “make the yuan convertible under the capital account,” according to a person familiar with talks now under way. The promise would be codified in a document charting the country’s economic course through to 2020, known as the 13th Five Year Plan. The current document only offers an open-ended commitment to “speed up” such reforms.

Such a promise, which may be cut from the final version, would float China’s currency and bring about a fundamental shift in the global economy as capital sloshed uninhibited between China and the rest of the world. Removing the barriers would force China’s leaders to relinquish a key means of economic control, with foreign investors and companies gaining greater access to the country and its 1.3 billion people.

“After the capital account is opened, the status of China’s financial markets will be significantly elevated,” said Zhou Hao, a senior economist at Commerzbank AG in Singapore. “It will serve the authorities’ goal to make China one of Asia’s financial hubs, along with traditional centers such as Hong Kong and Singapore.”

Making the yuan a global currency alongside the dollar and the euro has been a key goal for the government, and removing capital controls is necessary to achieve that.

China has pushed to bolster global yuan usage before an International Monetary Fund review of its reserve-currency basket next month, and authorities have signaled a freely convertible currency is key to building a strong domestic financial industry. On Thursday, the official Xinhua News Agency said the U.K. supports the yuan’s inclusion in the basket. As it stands, controls are so strict the yuan is traded at two levels -- the onshore rate, inside China, and the offshore rate, which foreign investors can access directly.

Even so, the government isn’t expected to relinquish complete control over the capital account. Opening China’s borders will proceed “step by step, to make sure the risk can be contained,” Wang Xiaoyi, deputy director of the State Administration of Foreign Exchange, said at a briefing Thursday.

New Tone

More broadly, the change reflects a new in tone the party wants to project with the next five-year plan. Rather than an economy racing to catch up with the rest of the world, no matter the cost, the new document will present China as a fully fledged member of the global economy, focused on steady growth.

“It will be a bumpy road ahead as China goes through a challenging economic transition and liberalization amid slower growth, high corporate leverage and national debt, widespread overcapacity, a deflating housing bubble and prevalent moral hazard in the financial sector,” economists at Barclays PLC said in a report ahead of the five-year plan.

The People’s Bank of China and National Development and Reform Commission didn’t immediately respond to faxed requests for comment Thursday. Chinese leaders will release a final five-year plan document after the nation’s legislature meets in March.

Other reforms being considered for the document would further knock down barriers that the leadership has used to maintain control of the economy. They include a proposal to lower obstacles to entry for non-bank financial firms from abroad, like companies in the securities, trusts and insurance sectors, according to the person, who asked not to be identified because the deliberations are private. There would be more room for Internet finance and investment from the private sector.

Some plans likely to be in the document are already known: The government will put an emphasis on home-grown technology for new-energy vehicles, robots and nuclear power, according to the person. China would also seek to reduce its reliance on core industrial components produced overseas, they said. The government is already pursuing a Made in China 2025 plan which aims to have 40 percent of core components and materials made domestically by 2020.

The new blueprint would seek to address some of the imbalances that resulted from 30 years of breakneck growth. The plan would look to make China’s urban and rural social welfare systems more equal rather than pushing for relentless urbanization. It would emphasize reducing carbon emissions and boosting the use of renewable energy, with a particular focus on wind and solar power, the person said.

— With assistance by Keith Zhai

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