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Will the Chinese Renminbi Become the New Dollar?

While HSBC has been impressed with the renminbi's "rapid internationalization" over the past two to three years and the significant progress made, it believes China still has a long way to go before the renminbi is fully liberalized and becomes a world currency.

Some commentators believe the internationalization has been far faster than expected. Indeed, according to HSBC's report, today more than 10,000 financial institutions transact business in the renminbi, up from just 900 in June 2011. Over the past 10 years, the currency has risen by more than 35% against the dollar and sterling.

While Chinese nationals are not entirely free to take money out of the country, in reality many are trying to do so illegally and using underground banks. At present the investment cap is set to $50,000 (c. 30,000 British pounds) per annum. But illicit transfer of funds comprising hundreds of billions leave China, according to the Wall Street Journal, and made it through Hong Kong with less-stringent capital controls.

As the renminbi is not yet fully convertible, the Chinese government has in recent years promoted an offshore market where the currency can be used outside the Chinese mainland. To further open up the currency for cross-border transactions, special administrative zones are being established such as the Shanghai Pilot Free Trade Zone (PFTZ) -- effectively the "hole" in China's currency wall. Here full convertibility is allowed but on a small scale and under certain circumstances.

According to financial guidelines published recently by the People's Bank of China titled Opinions on Leveraging the Role of Finance in Supporting the Construction of China (Shanghai) Free Trade Zone (December 2013), residents in the PFTZ can set up "resident free-trade accounts" in domestic and foreign currencies. Renminbi under these accounts will be fully convertible "when conditions are ripe." Other reforms within the PFTZ revealed in PBC's document are designed to further facilitate cross-border currency flows.

Provinces like Tianjin and Guangdong are also seeking permission to set up special trade zones to benefit from more relaxed cross-currency restrictions. If reforms in the special zones are rolled out nationally across China, the renminbi will in effect become fully convertible and a global currency, as HSBC predicts.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Tom Williams is an account manager and foreign exchange broker at GO Markets, a provider of online foreign exchange trading services. Contributing to GO Markets and a number of leading online publications, including Futures Mag, FX Empire, FX Street and Bullbearings.
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