The International Monetary Fund has urged China to eventually unwind measures taken to stem a stock sell-off that wiped out almost $4 trillion in market value, according to a person familiar with the matter.
The Washington-based fund told the Chinese government that while interventions in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces, said the person, who is familiar with IMF discussions on the issue and asked not to be identified because the talks are private. Chinese officials assured the lender that the measures should be considered temporary, the person said.
The IMF didn’t link its concern over the stock-market intervention to the fund’s review this year of whether to endorse the yuan as a reserve currency, the person said this week. That suggests that as long as the market measures don’t become permanent, China still has a path to secure the IMF’s approval by continuing to open its financial system.
The IMF’s currency review is focused on “a well-defined set of criteria,” including longer-term efforts to open the nation’s financial system and develop capital markets, fund spokesman Gerry Rice said separately Thursday at a regular press briefing in Washington. “It’s not something that would be decided on the basis of short-term market movements,” he said.
Chinese policy makers went to unprecedented lengths to put a floor under the market as the Shanghai Composite Index slumped more than 30 percent in four weeks through July 8. The People’s Bank of China didn’t immediately respond to a faxed request for comment.
In an effort to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system, China banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.
The IMF is in discussions with China over adding the yuan to its Special Drawing Rights basket of currencies alongside the dollar, euro, yen and pound. China’s request to join is subject to approval from the IMF board and may hinge on whether the yuan, officially called the renminbi, is deemed “freely usable.”
The extent of China’s market intervention prompted some analysts to speculate that it would hurt the yuan’s prospects of winning inclusion in the reserve-currency group. The yuan’s chances dropped “as a result of the market slump and government involvement,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, said earlier this month. He said policy makers may be less motivated to push through pro-market reforms after the slump.
China will allow the yuan to trade in a wider range against the dollar, the State Council said Friday, without giving a timeframe or scope for the potential adjustment. Flexibility will be increased, though the exchange rate will be kept at a stable level, the cabinet said.
The IMF, which reviews the composition of the SDR basket every five years, plans an informal board discussion on the issue by the end of this month, followed by formal talks in November, Rice said.
Winning the IMF’s blessing, following a rejection in the last review in 2010, would give the yuan prestige as a reserve currency that makes it more attractive for central banks to hold and potentially reduces the dollar’s dominance worldwide. From a technical standpoint, owning SDRs counts toward a country’s official reserves; the U.S. holds $50 billion worth, out of about $280 billion worldwide.
Rice said Thursday that the SDR review is “progressing well,” and IMF employees are interacting with Chinese authorities on an “ongoing basis,” with a lot of work still to do on the data side.