China is quietly pushing back its loose timetable to make the yuan freely convertible, policy insiders say, as authorities fear removing capital controls too soon could unleash damaging speculative flows that will make it harder to reshape the economy.
There has never been a hard target date for a freely traded yuan, although the central bank had outlined a goal of making it 'basically convertible' by 2015. That rhetoric has been toned down recently, and now analysts are looking to 2020, a deadline implied by the government's reform agenda set out last November.
Heading off a sharp slowdown in growth and domestic reforms, such as fixing the fiscal system to rein in debt, overhauling banks and state conglomerates will be done first, according to economists at top government think-tanks and policy advisers.
"Opening up the capital account will be the last of reforms. We need to improve domestic financial markets and improve legal systems first," said an influential former central bank researcher who now works for the government.
"That was the reason why other emerging markets were hit by speculators," said the researcher, who requested anonymity.
Hot money fears
While the yuan is already convertible under China's current account, the broadest measure of trade in goods and services, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing.
Nearly one-fifth of China's trade is now settled in yuan, up from less than 1 percent in 2009, when internationalization was seen as a way for firms to reduce currency risks and also to challenge the U.S. dollar's role as the key reserve currency.
As the yuan is increasingly used in trade and investment, as well as in offshore yuan trading hubs, investors have sought to skirt capital controls by exploiting various loopholes - some of which could remain until the currency is fully liberalized.
The government keeps a tight grip on speculative flows, but under the yuan internationalization scheme, firms can move their funds across the border via trade settlements.
One method is to borrow funds cheaply overseas and move them into China to profit from China's higher interest rates and, at least until earlier this year, a view the yuan would steadily rise. The funds are later repatriated.