China May Not Be Ready for Prime Time in 2015: The Ticker

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By William Pesek

China delighted currency traders yesterday as talk circulated about the yuan being fully convertible by 2015.

Yet the reports prompted more questions than answers. Can the disclosure be believed? Are officials in Beijing using the same definition of "fully convertible" as their developed-economy peers? Why was such big news spread second- and third-hand by members of the European Union's Chamber of Commerce in China?

Here's an even better question: Will China really be ready? Perhaps not.

Take South Korea. For all its merits as an economy -- stable growth, enticing markets, entrepreneurial spirit, Organization for Economic Cooperation and Development membership -- Korea has yet to make its currency fully convertible. Ditto for Taiwan, an economy far more advanced than China's.

Then consider the environment into which the world economy is moving. When Standard & Poor's yanked away America's AAA credit rating in August, that was emblematic of chaos closing in on markets. Europe's descent into crisis is accelerating and debt-ridden Japan is now what passes for a safe haven.

China needs growth in the vicinity of 9 percent to create jobs and spread the wealth needed to avoid social instability. Protecting the nation's all-important export machine may become even more vital between now and 2015, not less. Letting the yuan surge isn't the way to do that.
There are highly valid reasons for China to free its currency. It would reduce inflation, increase consumers' purchasing power, allow Chinese companies to expand overseas, enhance the yuan's global role and get the U.S. off Beijing's back. It's a necessary step toward economic maturity.

It's not clear, though, that either time or global events are on China's side. China's success in steering around the financial crisis of 2008 will be hard to repeat. The hundreds of billions of dollars of stimulus Beijing pumped into the economy led to a variety of problems, including mountains of bank loans that may go bad over the next few years.

China will allow the yuan to continue rising, as it should. Yet full convertibility means trusting markets to decide where it trades. For a government that is all about control, that may be an unacceptable leap of faith.

(William Pesek is a Bloomberg View columnist.)

-0- Sep/08/2011 15:08 GMT