Chinese yuan seen 20 percent undervalued

A sharp rise in the yuan could hurt the country's massive export sector, leading to job losses and -- the biggest concern to Beijing -- social unrest.

Sharp appreciation could also encourage capital inflows betting on yet more appreciation that could destabilise the economy, analysts say.

The Reuters poll showed that most respondents expect full convertibility of the yuan by 2020. Eight analysts said it would occur in five years.

Beijing is testing wider use of the closely controlled currency. In the past year, it has allowed trade with Hong Kong to be settled in yuan offshore and it has signed a host of currency swap agreements with trading partners from Korea and Indonesia to Argentina and Belarus.

Beijing has also floated the idea of the yuan as a reserve currency, leading two analysts polled to predict the yuan will be convertible within three years.

David Cohen of Action Economics in Singapore and five other analysts believe it will happen within five years, while three poll respondents gave a 5-10 year timeframe.

“Five years from now is a long time. Things are evolving very rapidly,” Cohen said.

Four analysts do not see full convertibility until after 2020.

Much will depend on whether China can progress with structural reform and rebalance its economy away from exports.

“If China's trade surplus shrinks and domestic demand continues to increase, it would make the magnitude of appreciation more moderate than is needed right now,” said Cohen.

Full convertibility would also require reform of the domestic capital markets and, ultimately, abandoning capital controls.

“Basically you're asking the Chinese communist party to release control. It's a big call on the politics, not the economy,” said Diana Choyleva, a director of Lombard Street Research in London.

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