The governor of the People?s Bank of China, Zhou Xiaochuan, on Friday said that the Chinese central bank does not have a deadline for full capital account convertibility of its currency, the RMB (Ren Min Bi) or Yuan.
?According to the definition of capital account, there are about 40-50 items in the capital transaction. We are busy with the step-by-step reform process. We do not have any timetable for the target,? Xiaochuan said at the Asian Financial Forum here on Friday.
Even the Reserve Bank of India is not keen on rushing into full capital account convertibility and is pitching for a more cautious timetable furthering the deadline by another decade by taking a gradual approach.
Xiaochuan said lowering of interest rate by the US Federal Reserve (by half point to 4.75%) on Tuesday was ?not too much of a constraint? for China. The governor said there was ?a chance for arbitrage and carry trades? due to the difference in interest rate between the US and China. ?We can see some kind of speculation,? he said, adding that, ?China is a large economy and its interest rate policy is based on domestic CPI, domestic investment, domestic consumption and balance of payment?.
The sub-prime crisis and the consequent volatility was a reminder that ?stability is of crucial importance,? he said.
The RMB convertibility was first raised by the Chinese government in 1993, and although it is being discussed again three years later, the 1997 Asian financial crisis has made the Chinese government slow down the process.
?There is a controversy. Some economists say that we should allow full capital convertibility, while some others say we should go slow. The party and the government are keen to gradually push forward capital account convertibility reforms. But it cannot be done in a short time and in a piecemeal manner. These are long term measures and we need to have comprehensive coordination in order to change the system,? Xiaochuan said.
He said the government was concerned about sudden rise in asset prices, including that of stock and real estate. ?But we cannot focus too much on them while policymaking,? he added.
On financial reforms, he said that there should be a total separation between commercial and political dealings. ?We also have to speed up disclosure standards, and also carry out reforms in the agricultural banking sector and the insurance sector?, the top official said. There are criticism on lack of proper accounting standards, huge non-performing assets of banks, and government control over the flow of information, all leading to financial suppression. Critics had called the situation a time-bomb waiting to explode, but the situation was a ?blessing in disguise? and the government decided to expedite the reform process,? he said.