China to Ease Controls on Yuan Investment in Pilot Zone

China will allow trial convertibility of the yuan under the capital account in a free-trade zone being established in Shanghai, part of efforts to boost the currency’s role in global trade and investment.

Authorities will allow “interest-rate liberalization, and cross-border use of the currency, as long as the risk is controlled,” according to a statement posted on the government website today. Chinese lenders will be able to conduct offshore business and qualified foreign financial institutions can set up banks, according to the statement, which didn’t give a timetable for the plans.

The move underscores Premier Li Keqiang’s pledge to open the economy to more market forces and reduce the role of the government at a time when growth is forecast to be the slowest in 23 years. The yuan was the world’s ninth most-traded currency in April, with transactions averaging $120 billion a day, from $34 billion three years earlier, the Bank for International Settlements said this month, citing survey findings.

“The yuan convertibility trial in Shanghai will be a big leap forward in China’s financial reforms,” said Banny Lam, the Hong Kong-based co-head of research at Agricultural Bank of China International Securities Ltd., a unit of China’s third-largest lender. “It shows that Premier Li is determined to continue with reforms to upgrade the economy. The next step is to see what lies in the details for the yuan experiment.”

The 29 square-kilometer free-trade zone located on the eastern outskirts of Shanghai will set up an adaptive foreign-exchange management system to facilitate trade and investment, and allow eligible Chinese banks in the zone to do offshore business, according to the statement.

China’s State Council signaled May 6 that it would propose a plan this year on capital-account convertibility. The nation should further widen the yuan’s trading band and increase the currency’s flexibility, according to an article in the People’s Daily published Aug. 28 by Wang Yu, an official in the central bank’s research bureau.

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