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.