Yuan Ticks IMF Reserve Entry Boxes as Goldman Sees Outright Yes

  • Standard Chartered says inclusion `basically a done deal'
  • Yuan onshore rate converges with offshore, markets opening

Bank of Singapore Sees IMF to Adding Yuan to Basket

China has ticked most of the boxes set by the International Monetary Fund to grant the yuan reserve-currency status, prompting many banks to predict approval this month.

An outright “yes” is the most probable outcome, Goldman Sachs Group Inc. wrote in an Oct. 29 note. JPMorgan Chase & Co. Chief China economist Zhu Haibin said any terms attached may be technical issues. Jukka Pihlman, head of central banks and sovereign wealth funds at Standard Chartered Plc in Singapore and a former adviser to the IMF, said the agency would seek to avoid the uncertainty of conditional approval.

“It’s basically a done deal, unless something really surprising and unexpected happens,” said Pihlman.

China has been seeking to join the Special Drawing Rights basket as part of a campaign to play a larger role in the postwar global economic order dominated by the U.S. and Europe. Membership of the IMF club would be a crowning achievement after three decades of breakneck growth that saw the Chinese economy take its place as the world’s second-largest after the U.S.

Here’s a look at what the IMF, in an Aug. 3 staff report, asked China to do, and how the nation has fared so far.

Rate Convergence

* IMF: The People’s Bank of China’s daily yuan fixing isn’t based on market moves, and the gap between the currency’s price at home and abroad means the offshore rate can’t be used as a perfect hedge for onshore exposure.

* ACTION TAKEN: 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. The central bank also took the previously rare step of intervening in the offshore yuan market, narrowing the gap with the onshore rate to about 0.4 percent from as much as 2 percent on Aug. 12.

"China would like to see the fixing, the onshore yuan and the offshore currency trade close together for SDR inclusion," said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “If the rates are significantly different, it may cause confusion and complicate the computation of the SDR rate.”

Hedging Tools

* IMF: There should be hedging tools -- such as cross-currency swaps with long durations, or enough shorter hedges that can be rolled over at reasonable cost -- for central banks to reduce exchange- and interest-rate risks.

* ACTION TAKEN: The PBOC said in July 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. China will allow foreign central banks to trade all onshore currency products, including spots, forwards, swaps and options, the PBOC said in a statement on Nov. 6.

Interest Rate

* IMF: China needs a yuan-based instrument for the SDR interest-rate basket. Such tools provide the basis for calculating the interest charged to members on loans from the IMF’s general resources and that paid on SDR holdings.

* ACTION TAKEN: The Ministry of Finance said it will start issuing three-month debt every week from the fourth quarter, which will help improve the short-term yield curve and promote the yuan’s internationalization. The central bank scrapped a deposit-rate ceiling on Oct. 24, pushing ahead with moves to free up the interest-rate system.

SDR Value

* IMF: There should be a suitable exchange rate during London trading hours to determine the SDR’s daily value in terms of the dollar.

* COMING SOON: China plans to extend the currency’s trading hours to 11:30 p.m. in Shanghai from the current 4:30 p.m., according to people familiar with the matter. That means the Chinese onshore market will be open after the noon SDR valuation in London. China has also begun publishing a yuan reference rate five times a day. The plan is to extend the hours by the end of November, the people said.

Capital Controls

* IMF: Further measures related to capital account liberalization need to be taken.

* COMING SOON: The Communist Party’s plan for the next five years proposes increasing the yuan’s convertibility in an orderly manner. The PBOC said on Oct. 30 that it will consider a trial program in the Shanghai free trade zone allowing domestic individual investors to directly buy overseas assets.

"Over time, the PBOC is likely to exit intervention in the foreign-exchange market and make the fixing mechanism more transparent and market-oriented," said Wang Ju, a Hong Kong-based senior currency strategist at HSBC Holdings Plc. "A more flexible exchange-rate regime will help China allocate its capital more efficiently and gradually move to a more balanced economy."

— With assistance by Tian Chen

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