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What’s Next For The Yuan After Joining The IMF’s Currency Club?
Perspective | 17 November 2015

The Chinese yuan is set to join the International Monetary Fund’s (IMF) 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 IMF’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.

Impact On The Yuan

Opinions are diverse, with Australia & New Zealand (ANZ) Banking Group saying inclusion will stave off depreciation concerns and Societe Generale predicting only a short-term advance.

“The market would have largely priced in the positive outcome from the IMF’s special drawing rights (SDR) review,” said Koon How Heng, a senior foreign-exchange strategist at Credit Suisse’s private banking and wealth management unit in Singapore. He cited a possible interest-rate increase in the US and concerns about global growth as positives for the dollar.

Swissquote Bank forecasts the Chinese currency to rise to 6.25 a dollar by 30 June on SDR inclusion, compared with the closing price of 6.3740 in Shanghai in the week ended 15 November. Other banks are less bullish, with HSBC Holdings and Standard Chartered predicting it will end the year at 6.5. The yuan fell as much as 0.1 percent on 16 November to a seven-week low of 6.3808 per dollar in Shanghai as terror attacks in Paris bolstered demand for the greenback.

Bond Effect
There will be a celebratory rally, says Invesco, which manages some US$791 billion globally. China’s interest rates beat those of major developed nations, with its 10-year sovereign yield at 3.1 percent, compared with 2.3 percent on Treasuries and 0.6 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 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 (PBOC) 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 11 August, 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.

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