What's Next for the Yuan After Joining the IMF's Currency Club?
Bloomberg News November 15, 2015
The yuan is set to join the IMF’s exclusive club of reserve currencies, with the fund’s staff supporting its inclusion after months of persuasion and policy changes by China.
Approval by the International Monetary Fund’s executive board would mark a major milestone for the yuan, officially known as the renminbi, or literally the “people’s currency.”
It will make more countries comfortable including it in their foreign-exchange holdings, while boosting President Xi Jinping’s efforts to open up the world’s second-largest economy.
Here’s a look at what’s next as the IMF board prepares to meet.
* Political Play
The board, which represents the lender’s 188 members, has to clear all expansions to the reserves basket. While staff say the yuan now fulfills the requirements of a freely usable currency, global politics may cast a shadow on the meeting scheduled for Nov. 30.
The U.S., which has 17 percent of votes on the executive board, last month sailed the USS Lassen within 12 nautical miles of Subi Reef, an artificial island created in the South China Sea by Chinese engineers. That drew protests from China’s foreign ministry.
That said, Washington has previously indicated support, saying in September that it backs the yuan’s inclusion provided it meets the existing criteria.
* Impact on the Yuan
Opinions are diverse, with Australia & New Zealand Banking Group Ltd. saying inclusion will stave off depreciation concerns and Societe Generale SA predicting only a short-term advance.
“The market would have largely priced in the positive outcome from the IMF’s SDR review,” said Koon How Heng, a senior foreign-exchange strategist at Credit Suisse AG’s private banking and wealth management unit in Singapore. He cited a possible interest-rate increase in the U.S. and concerns about global growth as positives for the dollar.
Swissquote Bank SA forecasts the Chinese currency to rise to 6.25 a dollar by June 30 on SDR inclusion, compared with last week’s closing price of 6.3740 in Shanghai. Other banks are less bullish, with HSBC Holdings Plc and Standard Chartered predicting it will end the year at 6.5.
* Bond Effect
There’ll be a celebratory rally, says Invesco Ltd., which manages some $791 billion globally. China’s interest rates beat those of major developed nations, with its 10-year sovereign yield at 3.13 percent, compared with 2.27 percent on Treasuries and 0.56 percent on German bunds.
SDR inclusion will also pave the way for foreign firms to sell bonds and shares in China, and persuade New York-based MSCI Inc. to include Chinese stocks in its indexes, said ANZ.
* Effect on Reforms
The impending SDR entry is seen within China as a victory for financial reformers such as People’s Bank of China Governor Zhou Xiaochuan, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong and a former IMF economist. The approval will strengthen their case for continuing with financial and economic reform, he added.
The PBOC overhauled its reference rate mechanism on Aug. 11, ordering market makers who submit contributing prices to consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates.
It has also said that foreign central banks, sovereign wealth funds and global financial organizations will no longer need pre-approval to trade bonds, interest-rate swaps or conduct repurchase agreements in the onshore market.
"The exchange rate is likely to become gradually more flexible in the coming two years,” said Kuijs.