Analysis: China's yuan experiment faces risks, legacy

Fri Jul 6, 2012 8:05am EDT
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By Kevin Yao

BEIJING (Reuters) - China's plan to test yuan convertibility in a new services hub being built near Hong Kong fanned excitement Beijing may be dismantling its rigid capital controls sooner than expected.

A reality check paints a different picture and suggests that China's latest test bed carries risks that will make the country's policymakers move slowly.

The experimental zone of Qianhai - dubbed a $45 billion "mini Hong Kong" - will be a pioneer of the gradual opening up of China's capital account. While China controls capital moving in and out of the country, it will allow freer movements of the currency in and out of Qianhai in the southern city of Shenzhen.

That was the plan announced by officials at the weekend with much fanfare in a series of policy incentives to mark the 15th anniversary of Hong Kong's return to China.

But analysts point to potential risks and cite setbacks from similar experiments. Chinese officials, including the central bank chief, have also expressed caution suggesting Beijing is likely to roll out any changes in baby steps, which have characterized the country's economic liberalization.

The biggest challenge for authorities will be to prevent companies from exploiting the zone, from inside or outside the area, because of the easier terms on capital account transactions, said economist Zhao Qingming.

"Once you open a hole in the capital account in a certain area, it means the capital account is open for all of the people," Zhao, of China Construction Bank in Beijing, said.

BARREN   Continued...

An employee counts Chinese 100 yuan banknotes at a branch of Industrial and Commercial Bank of China. REUTERS/Stringer