China Is Running An Experiment To See What It's Like To Have A Truly International Currency

china renminbi

Photo: AP Images

China is creating a special zone to experiment with currency convertibility in Shenzhen, a major city southern China’s Guangdong province, according to Reuters.The $45 billion planned Qianhai economic zone, across the sea from Hong Kong, will be the setting for this experiment on two-way yuan flows between China and Hong Kong.

Earlier this year we reported that a Hong Kong-Shenzhen cross border renminbi scheme had been submitted to the State Council for approval. This seems to be part of the same reform and more details are expected to emerge tomorrow when Chinese president Hu Jintao visits Hong Kong tomorrow for the 15th anniversary of Hong Kong’s handover to China.

During the visit Chinese policymakers are also expected to push for joint ventures for Stock Exchanges in Hong Kong, Shenzhen and Shanghai.

This is another step in making the yuan fully convertible by 2015 and to open up the country’s capital account.

The capital account which includes foreign direct investment (FDI), portfolio and other investment has strict controls in place to regulate the inflow and outflow of capital, to prevent any sudden impacts to the Chinese economy.

Just as importantly, some think Shenzhen has been singled out for this reform since back in the 80’s it was the country’s first special economic zone, and ground zero for some of Deng Xiaoping’s reforms which opened the economy up to the world.

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