As China moves to free up yuan, investors want more

State-owned Bank of China's move to offer limited deposit services in the renminbi to US customers represents a tiny step in what will be a long journey for the Chinese unit to become a widely-traded international currency.

The move generated little buzz among fund managers and investment banks eager to see more aggressive changes from China, but most were hopeful it could lead to more flexibility in the currency.

The Bank of China's news, reported by newspapers and news wires on Tuesday, is significant because it is the first Chinese bank to widely offer non-corporate deposit services in the renminbi, also known as the yuan, outside Hong Kong and mainland China.

"It's indicative that they're moving in the right direction but we need to see China move a little faster before we can get excited about being able to fully trade the currency," said James Dailey, chief investment officer at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania. Dailey's firm manages assets of around USD 130 million.

"It's a situation where I'd like to see the yuan floating and freely convertible for a little bit more before I start investing in it."

The New York branch of Bank of China, the country's fourth-largest bank, said it now lets companies and individuals buy and sell the yuan via accounts with its US branches. US businesses and individuals can also trade the currency through Western banks

Apparently, the BoC has been accepting deposits since February last year. It's also a service available at all its international branches in the 29 countries where it operates and has been doing so since early 2010.

The terms, though, are limited. Essentially, any individual can open a yuan account, but cannot deposit or withdraw funds, unless somebody remits to the account in the local unit.

Bank of China limits the amount of local currency that can be converted by US individuals to USD 4,000 per day, but there is no limit on the amount that can be converted by US businesses if engaged in international trade.

No arbitrage opportunity

Anthony Chung, director of currency strategy research at money manager AllianceBernstein in London, also viewed Bank of China's initiative as a "step in the right direction" but it's not useful for him as a portfolio manager. Alliance manages assets of more than $480 billion.

Chung said there's no difference in the price of the yuan both onshore and offshore that he can use to his advantage. "There's no sense that you could arbitrage things."

The Bank of China news was met by skepticism from some in the banking community.

"This is not a new capability by any means so the timing of the story is curious," said a banking source, adding that all state-owned banks with U.S. offices can effectively offer deposit services although at varying degrees.

The story came ahead of a scheduled state visit to Washington by Chinese President Hu Jintao next week. It's an event that could spotlight China's currency policies again.

In the run-up to Hu's visit, Treasury Secretary Timothy Geithner renewed his call on Wednesday for China to allow the yuan to appreciate further against the dollar.

Since unshackling the yuan from a peg to the dollar in June, it has risen just 3 percent. Some estimates show the yuan is undervalued by roughly 20 percent.

"It seems that no matter what China does, it will still come under criticism," said Win Thin, global head of emerging market strategy at Brown Brothers Harriman in New York.

He thinks the BoC news reflects the fact that China is "feeling more comfortable about the global outlook."

The pace to free up China's currency will remain slow, said Thin. "No matter what the US says and does, China will continue to move at the pace of liberalization that's best for China's interests, not for the United States."

Meanwhile, measures to internationalize its currency continues.

China last year established a renminbi market in Hong Kong, a former British colony under Chinese sovereignty. Anyone with a Hong Kong yuan account is now able to trade the currency. The Chinese yuan market has therefore created opportunities in corporate hedging and cash management.

On the trade side, Chinese regulators early last month also increased the number of exporters that can use yuan to settle international transactions from a few hundred to nearly 70,000.