IMF Ratio Concern Depresses Yuan as Mizuho Warns of Further Drop

  • Yuan heads toward three-month low as analysts debate weighting
  • Investors seen reducing currency holdings before IMF vote

The yuan fell toward a three-month low amid concern China will win a smaller weighting in the IMF’s Special Drawing Rights than some analysts predict.

While International Monetary Fund staff estimate a weighting of 14 to 16 percent, the market consensus is for 10 percent because of the currency’s limited usability, according to Mizuho Bank Ltd. Anything less than that will spark a decline, said Ken Cheung, a Hong Kong-based strategist at the Japanese lender. Many observers are still going by the IMF projection, said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada.

“We could see knee-jerk selling if a weight of 10 percent is announced,” said Hong Kong-based Trinh. “I wouldn’t be surprised if the offshore yuan broke beyond 6.45 a dollar and proceeded to test 6.50 immediately following the SDR announcement, or in one to two weeks. The onshore yuan is entirely dependent on the daily fixing, but it will probably test the weaker end of the trading band.”

The yuan fell 0.07 percent to 6.3942 a dollar as of 10:19 a.m. in Shanghai, China Foreign Exchange Trade System prices show. It dropped to 6.3955 on Nov. 23, the lowest since August, and is headed for a fourth weekly decline. In Hong Kong’s offshore market, the yuan lost 0.05 percent on Friday and 0.26 percent from Nov. 20 to 6.4384. The People’s Bank of China cut its daily fixing, which limits the onshore yuan’s moves to 2 percent on either side, by 0.03 percent to 6.3915.

Board Meeting

The IMF’s executive committee is scheduled to meet on Monday to decide whether to accept the yuan into the lender’s basket of reserve currencies. Inclusion will spur inflows of as much as $1.1 trillion in five years, according to Standard Chartered Plc. Central banks will allocate $770 billion to the yuan in the coming six years if the currency gets a 14 percent share, and $540 billion if the figure is 10 percent, according to Credit Agricole CIB.

At the IMF’s last five-yearly review in 2010, the dollar was granted a weighting of 41.9 percent, the euro 37.4 percent, the pound 11.3 percent and the yen 9.4 percent. The ratio is decided based on the country’s exports in terms of goods and services. SDRs, which amounted to about $280 billion globally as of September, are claims that can be converted into any of the basket’s currencies.

“A weight below 10 percent would probably be interpreted as a less significant reserve-currency status for the yuan and less capital inflows to yuan-denominated assets would be implied, putting the currency under pressure," said Mizuho’s Cheung. “Investors will likely continue to reduce their yuan exposure ahead of the SDR vote" to avoid such uncertainties, he said.

— With assistance by Tian Chen

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