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Will China's New Leadership Step up Plans to Liberalise the Renminbi? #FXdebates

LONDON, November 15, 2012 /PRNewswire/ --

  • Weaker growth and a lack of financial reforms are the key challenges facing the new Chinese government in liberalising its currency
  • Latest e-book launched by Saxo Capital Markets argues that internationalisation of the Renminbi is likely to be a cautious and long term process

As China's new leaders take their seat at the Politburo Standing Committee on Thursday, we will have a first glimpse into how China's policy will shape the global economy over the next ten years. The impact on the liberalisation of the Renminbi will ultimately depend on their ability to drive growth and carry out reforms, says Saxo Capital Markets.

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Nick Beecroft, Senior Analyst at Saxo, comments:

"The key question in the Chinese power transition is how free will China's new leaders be to drive growth and reform. Both the government and the People's Bank of China have stated that the internationalisation of the Renminbi and foreign exchange reforms are necessary to move to a market economy and better reflect China's weight in the world's global economy, but resistance from the conservatives and hardliners ruling the party could make reform difficult."

In "Yuan Diplomacy", the second e-book in Saxo Capital Markets' FX Debates Series, Saxo uncovers the challenges ahead for the Renminbi's liberalisation process, with the conclusion that such a tricky and drawn-out process means that it will be a long time before it becomes an internationally traded currency - let alone the new reserve currency.

Nick Beecroft explains:

"Liberalising the use of the Renminbi in international trade and cross-border investment is a slow, step-by-step strategy.

"Crucial conditions, such as deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions, need to be met before any meaningful progress to internationalise the Renminbi can be made. Due to the high level of complexity of today's global financial markets and huge imbalances in the Chinese economy, the authorities' approach is extremely cautious - and therefore slow."

The new leadership will also face a tough choice on whether to continue fighting with the US over its currency policy. In 2005, urged by its trading partners, China took steps to end the RMB peg to the US Dollar, allowing carefully-controlled and gradual Renminbi appreciation. However, since the crisis struck in 2008, Chinese authorities became concerned about the deterioration of world trade and the consequences of a stronger Renminbi, putting a halt to its appreciation until it became confident enough to allow it to strengthen again during 2010 .

"The alleged unfair weakness of the Renminbi against other major currencies like the US Dollar has led to simmering tensions between the United States and China over the last 10 years. Although the U.S. Treasury so far has abstained from labeling China a 'currency manipulator', fearing a huge diplomatic incident that could lead to the introduction of more trade tariffs, this remains an ongoing issue," Nick Beecroft says.

Nick Beecroft explains that, while the Chinese current account surplus has diminished rapidly (from 10% of GDP in 2007 to 2% this year), a permanent decision to stop the Renminbi's appreciation could potentially have disastrous consequences. "That is why the Chinese government and central bank are treading carefully, with the double-objective of not harming their exports further and keep their top trading partner if not happy, at least amenable."

"Longer term, it is uncertain whether the Renminbi will continue its ascent - it has slowed to a crawl and even reversed somewhat during 2012.  With a dwindling trade surplus and volatile speculative flows, it could actually depreciate, especially if the Chinese economy falls off a cliff, or there are rumours of a property collapse or banks going bust. This could lead to capital flight if China had an open current account and that's why they don't. They take this in very gradual steps," Nick Beecroft says.

"Yuan Diplomacy" is the second part of Saxo's e-book, #FXdebates - Trading Insights from our Top Analysts, which focuses on trends in currency movements and pairings, the challenges affecting FX traders and advice on key trading strategies. The first article on the future of the US Dollar was published on November 7. The other articles in the #FXdebates series will focus on:

  • Gold - Just another currency?
  • The Euro in Crisis
  • Currency Wars: Battle Of The Weakest

The #FXdebates series of articles will be published over the next four months, leading the way to an event in February 2012 in collaboration with Bloomberg LINK.  

For more information please see:

Follow the debates via twitter:

Hashtag: #FXdebates

About Saxo Capital Markets

Saxo Capital Markets UK Limited is a wholly owned subsidiary of Saxo Bank A/S, the parent company of the Saxo Bank Group, an international financial services group specialising in trading and investment across global financial markets. Saxo Bank has operated in the UK since March 2006, initially as a branch of Saxo Bank A/S and since 1 January, 2012 as Saxo Capital Markets UK Limited.

Saxo Capital Markets UK offers private investors online trading and investment in FX, CFDs, ETFs, Stocks, Futures, Options and other derivatives, and online wealth management for Funds, Shares, ETFs, Certificates and Bonds. Saxo Capital Markets UK also offers online trading services to a broad institutional client base including Hedge Funds, Introducing Brokers and Money Managers through our award-winning trading platform SaxoTrader, SaxoWebTrader and SaxoMobileTrader and Saxo's B2B/API services.

Additionally a large base of Banks, Brokers, Asset and Money managers, utilise our award winning white label solutions, in order to provide their clients with access to all or some of our trading platforms and associated liquidity.

Find out more about FX Trading opportunities with Saxo Capital Markets.

Media enquiries

Uriel Alvarado Cancino, Chief Public Relations and Marketing Officer, Saxo Capital Markets UK
+44(0)207-151-2026, [email protected]

Nicholle De Beer, Public Relations and Marketing Manager, Saxo Capital Markets UK
+44(0)207-151-2024, [email protected]

+44(0)20-7360-4900, [email protected]

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