The Wall Street Journal last week put it’s finger on just why the Chinese government has been reluctant to make its currency, the yuan, convertible; that is, so institutions and central banks can by and sell the currency and countries can keep reserves in it, too.

Capital account convertibility for the yuan would subject Beijing’s policies to the judgments of individual investors at home and abroad capable of contributing to large capital flows, including highly temporary and speculative gushes. It would put China’s economy much more at the mercy of global financial forces.

Mind you, it’s understandable after the Asian Financial Crisis of 1997 that the powers that be do not want to expose the yuan to Homerian struggles. Hong Kong, though, might prove the launch pad for a scheme that with time might build China’s confidence that it can effectively manage potential flights from its currency under market conditions:

This can best be accomplished in the short run by creating an offshore market for yuan financial instruments that foreign central banks and investors can trust. China’s latest move to create an offshore market in Hong Kong for yuan-denominated Chinese government bonds does just that. While the first step is very small, it might mark the beginning of a scheme to provide opportunities for central banks and investors to store capital in a secure, tradable and liquid form of yuan deposits.

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