What’s Next for the Yuan After Joining the IMF’s Currency Club ?

Bloomberg:

Proposal’s need for board approval brings politics into play

Invesco’s Hu sees increased flows into onshore yuan market

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.

QuickTake
The People’s Currency

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.

* 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. The yuan fell as much as 0.11 percent on Monday 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’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. Rates on Chinese bonds due October 2025 and September 2020 were steady at 3.16 percent and 3.00 percent, respectively, as of 10:47 a.m. in Shanghai.

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.

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