- The renminbi will appreciate 2-3-% per year on average over the next five years. A stronger currency is the only way to limit the high cost of forex sterilization.
- The PBOC will widen the currency bands whenever hot money flows reappear until they are +/- 5%.
- The principal drivers of the currency will be China’s current account surplus and China’s status as one of the world’s largest creditors.
- Greater renminbi flexibility will be accompanied by continued strides to develop local debt instruments.
- In contrast with other interest rates, deposit rates will not be deregulated anytime soon.
- The ongoing internationalization of the renminbi should be viewed as means for lowering the cost of trade transactions rather than a driver of the currency per se.
- The final phase of China’s financial evolution will lead to substantial overvaluation by as much as 25% to 30%.
- Complete convertibility including financial flows will be among the last of the financial reforms.