Offshore Yuan Rises as Communist Party Stresses Convertibility

Updated on
  • Five-year plan seeks foreign-exchange management overhaul
  • IMF status would show incredible progress made: Brown Brothers

The offshore yuan strengthened for the first time in three days after Chinese leaders pledged in a new five-year plan to make the currency more easily convertible.

China is already seeking the currency’s inclusion in the International Monetary Fund’s reserves basket, an outcome that could materialize as soon as this month. The Communist Party said in the development plan that it will overhaul its foreign-exchange management, according to a report Tuesday from the official Xinhua News Agency. It coincided with a People’s Bank of China website article, citing comments from Governor Zhou Xiaochuan, that a link between Hong Kong and Shenzhen stock exchanges would begin in 2015, which were later stated as coming from a May 27 speech.

“A freely usable currency is China’s long-term goal as it opens up the domestic market,” said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment Consultancy Ltd. “The Shenzhen connect is a short-term boost to the market as it means more yuan usage. Some investors will have to pare bearish bets on the yuan as gains become more solid and rapid.”

The yuan traded in Hong Kong snapped a two-day drop of almost 0.5 percent and rose 0.03 percent to 6.3491 a dollar as of 4:54 p.m. local time, data compiled by Bloomberg show. The onshore currency in Shanghai closed little changed at 6.3360, according to China Foreign Exchange Trade System prices. The PBOC, which was seen selling the greenback after devaluing the currency on Aug. 11, cut its daily fixing by 0.05 percent to 6.3343.

Link Surprise

Zhou’s comments on a 2015 start for the Hong Kong-Shenzhen equities tie-up, which will follow a similar program with Shanghai that kicked off last November, came as a surprise to many investors. Ten of 13 respondents in a Bloomberg survey in September predicted it would begin next year as authorities focused on stabilizing mainland share prices after a recent rout. The Hong Kong-Shanghai connect allows investors to directly access companies traded in both markets.

The yuan’s inclusion in the IMF basket looks highly probable and would be a recognition of the “incredible progress” that China has made in opening markets and internationalizing the currency, Brown Brothers Harriman & Co. analysts wrote in a note dated Tuesday.

The authorities will opt for a "negative list" foreign-exchange system -- an approach that lets companies do anything that’s not specifically banned -- and open up the finance industry, Xinhua reported, citing the Communist Party plan. Separately, President Xi Jinping announced an annual economic growth target of at least 6.5 percent for the next five years, compared with 2015’s goal of 7 percent that would be the slowest in 25 years.