Yuan Seen Pegged Into ’16 as IMF Extends Reserve-Currency Window

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Yuan Pegged

China will probably keep the yuan pegged to the dollar into 2016 after the IMF signaled a delay to giving it reserve status.

The country’s authorities have kept the yuan at about 6.2 a dollar in Shanghai since March, seeking to spur global usage before a review of the International Monetary Fund’s Special Drawing Rights in November. The lender’s staff members proposed delaying the basket’s expansion to September 2016, from the year-end, in the event that a decision is made to add the yuan.

“It is possible that China may continue to hold the yuan stable into next year given the push out of likely SDR entry date,” Nomura Holdings Inc. strategists Craig Chan and Wee Choon Teo wrote in a note. Australia & New Zealand Banking Group Ltd. expects the People’s Bank of China to maintain a tight grip on the currency until admission to the SDR basket in September 2016, while Goldman Sachs Inc. said the approaching decision is among the reasons why the yuan will remain broadly stable in the coming months.

The de-facto peg to the dollar has made the yuan the best performer in emerging markets over the past three months, helping stem capital outflows as Chinese policy makers seek to arrest a $4 trillion stock-market rout. Inclusion in the IMF’s SDRs would attract as much as $1 trillion from abroad into China’s bond market over five years, Standard Chartered Plc estimated in May.

Yuan Strength

Yuan purchases to support the exchange rate come at a cost, contributing to a $299 billion drop in China’s foreign-exchange reserves over the past four quarters to $3.69 trillion. The nation still has an “expendable war chest” of $1 trillion to $1.5 trillion to support the currency, Mirza Baig, Singapore-based head of foreign exchange and interest-rate strategy for Asia at BNP Paribas SA, said last month.

The PBOC reiterated on Tuesday that it will improve the exchange rate’s system and keep the yuan stable at a reasonable, equilibrium level. The yuan fell 0.06 percent over the past three months, compared with a 6.7 percent decline in a Bloomberg-compiled gauge of emerging-market currency performance. Implied volatility for the next 12 months, a gauge of expected price swings, is the second-lowest among 23 emerging-market currencies. Only the Hong Kong dollar, which has been pegged since 1983, is seen being more stable.

‘Good Chance’

The IMF’s comments on the yuan reinforce the likelihood that the currency will be selected for SDR inclusion at the coming review, Standard Chartered and UBS AG said Wednesday.

“It shows that the fund is preparing for a good chance that the yuan will be included in the SDR this time around,” said Becky Liu, a Standard Chartered strategist in Hong Kong. There would be no need to extend the implementation date if prospects for success were low, she added.

It’s a unique step from the IMF, and it confirms that the institution ultimately wants to include the yuan, said Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong.

The IMF staff proposal isn’t necessarily seeking to delay the call on the SDR basket, although the timing may still change, Goldman Sachs Inc. analysts including MK Tang and Yu Song wrote in a note.

A stable exchange rate can help boost usage, raising the yuan’s profile as a funding and reserve currency, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “The yuan will have to stay stable for longer,” he said.

— With assistance by Fion Li, and Tian Chen

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