China’s capital account liberalisation dynamics

China is expected to achieve its stated goal of "managed convertibility" - a medium-term steady state - by 2018. Restrictions on most capital transactions with a genuine economic basis will have been considerably reduced by then, with tight controls likely to be maintained only on short-term flows and those viewed as speculative. While safeguards such as quotas and lock-up periods are likely to be retained for many capital account transactions, the degree of freedom for capital flows will be substantially higher than it is today.

The PBoC has committed to launching a series of reforms in 2015 to make the Renminbi more freely useable and bolster the case for the currency's inclusion in the SDR basket. This is expected to be followed by a range of new steps over 2016-18 (outlined in the table below) as China makes steady progress toward managed convertibility, states Standard Chartered. For capital account transactions such as cross-border credit, quotas may be abandoned entirely in favour of prudential rules. 

Domestic interest rate liberalisation and the development of Free Trade Zones (FTZs) will provide important support onshore for China's Renminbiinternationalisation push. The news here is encouraging. Standard Chartered expects, domestic interest rates to be fully liberalised this year and see the recent introduction of certificates of deposit (CDs) for non-financial investors as a stepping stone to full liberalisation of deposit rates. 

New FTZs and pilot programme areas, especially in central-western China, will likely broaden the scale of onshore experimentation with more liberal capital account rules, adds Standard Chartered. Corporate treasurers in particular stand to benefit from broader channels for repatriating offshore funding to mainland China and lower eligibility thresholds for pan-China cross-border Renminbi two-way cash sweeping.