China to expand pilot freeing capital account convertibility-sources

BEIJING (Reuters) - China plans to let the yuan be traded with few restrictions in all of its free trade zones in coming months and later this year take nationwide the pilot scheme that is meant to make the currency more freely convertible, three sources with direct knowledge of the matter said on Friday.

The scheme, which gives companies the freedom to move the yuan and other foreign currencies in and out of China for capital account transactions, is currently being run only in the Shanghai free trade zone.

The sources said the experiment will first be expanded to three other free trade zones in Guangdong, Fujian and Tianjin in coming months, before being broadened across China by the end of this year.

No details were available on how the experiment will be expanded nationwide, and the central bank did not comment when contacted for this story.

A nationwide experiment to liberalise the capital account will be milestone move toward reducing China's control over the yuan - which is also called the renminbi - and will bolster Beijing's ambitions to transform the yuan into a global currency.

China currently operates an administered peg exchange rate system, whereby the yuan-dollar exchange rate is allowed to fluctuate by two percent either side of a midpoint fixed by the central bank each day.

Authorities have agreed to broaden the experiment as quickly as possible this year in the hope of lowering steep borrowing costs in China, sources with direct knowledge of the matter said.

They declined to be named as they were not authorised to speak to the media. No details were available on how the experiment will be expanded nationwide, and the central bank did not comment when contacted for this story.

"It's very difficult to rely solely on domestic reforms to solve the problem of expensive financing," one of the sources said. "The higher-ups hope that by opening (the capital account) to the outside world, new solutions will be available and domestic financing cost will move towards the international level," the source said.

Expensive financing cost is a perennial problem in China, especially for private companies, partly because state-owned banks prefer to lend to large state-run firms.

To temper borrowing cost and stoke economic growth, which hit a six-year low between January and March, China twice cut interest rates and twice lowered the amount of reserves that banks must hold in the space of five months.

A further liberalisation in the capital account coincides with China's hopes of including the yuan in the International Monetary Fund's currency basket this year.

The inclusion of the yuan in the basket is seen by many as a move that elevates the global standing of the yuan, and underscores China's emergence as a global power.

The IMF's currency basket of Special Drawing Rights, which are bought by governments with their foreign reserves, currently comprises of the dollar, the yen, the euro and sterling.