Better to be slow than sorry on the currency

It is the great yuan conundrum. Although a recent poll by Bloomberg News found a majority of investors believe the Chinese currency will be fully convertible by 2016, there is no consensus among analysts it is inevitable.
In the words of Dr Stephen Ching, an associate professor in the School of Economics and Finance at the University of Hong Kong, the process will be "conditional" as well as "gradual".
"It depends on the development of the financial market in China, on whether China can afford to have the [yuan] convertible or not, and on the global situation of the financial sector, like the Asian financial and global financial [markets]," he says.
"If a crisis hits again, they will be unlikely to make the currency convertible. It's not realistic to have a definite timeline."
A key factor against making the yuan convertible is that doing so would reduce China's control over its own monetary policy, says Dr Ching, whowas the first Hong Kong academic to be made a research fellow by the Hong Kong Monetary Authority.
If China's aim is keeping inflation under control - currently a major concern, with April's figure recorded at 5.3 per cent - the central bank can raise interest rates further. If the yuan was fully convertible, an increase in interest rates would result in an inflow of capital into the country, working against efforts to curb inflation.
The current policy of making modest steps towards increasing convertibility is "a good practice", says Dr Ching.
Among the measures already introduced by Beijing and highlighted in recent reports is the creation in Hong Kong of an offshore market for yuan transactions. Yuan-denominated overseas loans and currency swaps, along with other moves, have also indicated a greater degree of convertibility than in the past.
Continuing such a step-by-step policy is the right thing to do, Dr Ching says, because "when you try to liberalise the [yuan] there will be lots of uncertainty".
"To deal with this, it's better to adopt a gradual approach," he adds. "If you make it more convertible, it's really difficult to go back. There is a rigidity in terms of liberalisation.
"If you take a [step] that's too drastic with the convertibility . you may subject the economy to uncertainty you will not be able to manage. The current approach is a good approach. It's better slow than sorry."
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