China Won't Make Yuan Fully Convertible; Fears Hedge Funds

China won't make its currency fully convertible for at least five years because it worries hedge funds may force the yuan to plunge, much as happened to the Korean won and Thai baht during the 1997 Asian financial crisis, said Li Deshui, a member of the central bank's monetary committee.

"There's more than $800 billion to $1 trillion of hedge funds in the world and the Chinese financial system is relatively weak," Deshui, 61, said in an interview with Bloomberg News. "If the yuan becomes fully convertible it would be attacked by these hedge funds."

I think Deshui's comment is partly valid and partly an excuse. However, if the yuan were made fully convertible, it would create an incredible arbitrage opportunity (i.e. long-dated forward contracts) and hedge funds would be scrambling to get a piece of the action.