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A fully convertible RMB in five years?

That's what a top Shanghai official predicted this week

IN China's reform timetable, five years could be considered a blink of an eye: that's how fast a top Shanghai official is expecting the national currency to achieve full convertibility in the international marketplace. 

The prediction by Shanghai's executive vice-mayor Tu Guangshao at an annual financial conference in Hong Kong on Monday makes him stand out as the most optimistic about China's willingness to liberalise foreign exchange trading of the renminbi, also known as RMB or yuan. "It's more likely to happen in five years, rather than 10," Mr Tu said.

 Just as he spoke, RMB hit a record high of 6.044 to the US dollar - the highest since Beijing started experimenting with a managed float in 2005.

Offstage, the consensus from hundreds of participants at the Asian Financial Forum, in an instant electronic polling, was 5-10 years. Fu Yuning, chairman of China Merchants Group, which runs one of the most successful banking operations in China, was among the most pessimistic and cited 10 years as guidance.

Mr Tu also revealed a decision by China's central bank, the People's Bank of China, to publish - as early as this first quarter - a set of detailed guidelines governing the opening of the nation's capital accounts, the prerequisite for RMB to be fully convertible in foreign trade.  "The year 2014 is a critical year," Mr Tu said, adding "there will be concrete progress in the financial reform in the Free Trade Zone". 

A fully convertible RMB is expected to happen first in the Free Trade Zone in Shanghai, whose financial reform model is set up in a "4-plus-1" scheme.  As Mr Tu explained, the four elements are the convertibility of China's capital accounts; the cross-border use of RMB; a market-based interest rate regime; and foreign exchange management.   The "1" represents an integrated system for financial services, financial management and market demand.

Levin Zhu, CEO of China International Capital Corp, said: "I would say between five and 10 years, depending on the success of reform." He thought the key to China's reforms was to move the domestic economy to a market economy. 

Outside China, RMB's road to internationalisation has progressed far speedier than at home.  Not only has it become one of the 10 most traded currencies internationally, it has gained wide acceptance among investors.

The Lord Mayor of London, Fiona Wolf, who also oversees much of the UK's financial sector, said at the same forum that London has benefited in particular from RMB-related foreign exchange and trade finance. 

London, a financial centre responsible for 40 per cent of the world's foreign exchange transactions, saw a doubling in its RMB-denominated foreign exchange trading in the last year and a tripling of RMB-denominated trade finance services in the last two years, according to Ms Wolf. "The prospect of growth is just huge for all of us," she said.

"We are out there actually promoting the currency (RMB), promoting trade with China, promoting export and investment in both directions," she added.

Though she did not cite exact figures, her office had released a report in December, announcing spot renminbi (RMB) foreign exchange turnover in London almost doubled in the first half of 2013 from a year earlier to reach a daily value of US$4.8 billion.  In trade-related services, London handled a total of £3.3 billion (S$6.9 billion) in the first half of 2013.

By comparison, Hong Kong's offshore RMB clearing centre, the world's largest, processed an average volume of 400 billion yuan (S$83 billion) every day, or one out of every five yuan traded offshore, according to a speech delivered at the same forum by Hong Kong Chief Executive CY Leung.

The key initiatives Hong Kong has undertaken recently to promote RMB include extending RMB trading hours to 15 to facilitate settlements by investors in Europe through Hong Kong's system, and setting up private-sector cooperation with London, Paris, Australia and, more recently, Malaysia.

Overall, Hong Kong handled well over 3 trillion yuan in offshore RMB trade settlement in the first 11 months of 2013, and has issued more than 330 RMB-denominated bonds since 2007, raising a total of 309 billion yuan.  Total RMB deposits in Hong Kong stood at 1 trillion yuan at the end of 2013, Mr Leung noted.

The RMB's popularity is most astonishing in Taiwan, a self-rule island that China has threatened to take back by force when necessary.  Jih-Chu Lee, chairwoman of the Bank of Taiwan, the largest bank in Taiwan, said: "Because European countries and the US are still deleveraging, it would give Asian banks more room to expand in this opportunity."

RMB internationalisation also presents Asian banks a unique opportunity because it's a currency based in Asia, she added.