From the FT:
The International Monetary Fund’s staff has recommended that China’s renminbi should join the elite basket of currencies used to value its own de facto currency.
The move is a vote of confidence in China’s economic reforms and its efforts to establish the nation’s currency as an international reserve asset.
If approved, as expected, at a November 30 board meeting, it would mark the first significant change to the IMF’s “Special Drawing Rights” (SDR) basket since the inclusion of the euro at its creation in 1999.It would also be a victory for China, which has been eager to see the renminbi join the dollar, euro, yen and pound in the basket, and gain the stature of a reserve currency that comes with it.
I recall when I first visited China at the turn of the millennium as the publisher of The Diplomat that I was full of wide-eyed expectation that I was visiting the most swiftly liberalising communist nation on earth. I had only been there a few days when the magnitude of my own naivete dawned on me. I had arrived thinking that as China joined the global economy it was certain that it would shift economically and politically into the accepted Western rules based order of things. Shortly afterwards, having been humbled by the vastness of the transformation underway, I realised that it was actually going to be the reverse, that the established rules based order was going to have to bend to accommodate China.
And so, here we are, not much more than a decade later, and we have a closed capital account, self-evidently not freely tradable currency being admitted to the SDR basket, in contradiction with every tenet that underpins it. This is a diplomatic moment of triumph not an economic one.
Zero Hedge has some sell side reaction:
HSBC:
- SDR inclusion would encourage China to stick to much- needed financial and capital-account liberalization, Paul Mackel, HK-based head of global research, writes in note dated Nov. 14
- USD/CNH moved above 6.4000 on Friday, which could suggest that more flexibility on yuan is coming
- Market players will want to see more volatility in the currency eventually; hence, inclusion in SDR doesn’t necessary mean that the RMB will be stronger
- Knee-jerk reaction for yuan to strengthen should be temporary; will be interesting to see if PBOC decides to become more hands-off
Commerzbank:
- China needs to show commitment to further opening up its capital account and accelerate domestic financial reforms, led by interest-rate liberalization, Zhou Hao, Singapore-based senior economist, writes in email
- Country needs to improve policy transparency to attract global investors; that would build trust between global investors and Chinese authorities
- PBOC should reduce frequency of intervention, allowing market forces to play a critical role
- China should provide more hedging options to corporates and financial institutions, so they can prepare for greater financial-market volatility
Huabao Trust:
- China stepped up rates liberalization in run-up to SDR inclusion; now it may increase pace of financial reform, Nie Wen, Shanghai-based economist, says in phone interview
- Onshore-offshore yuan spread is expected to narrow in coming days
- PBOC’s monetary policy stance will still be the most important element for investors to gauge regarding the yuan’s trading direction
- A more market-oriented system is crucial for Chinese capital markets; a “reasonable” pricing of domestic assets will reduce systemic risk
Maybank:
- Inclusion will largely be a symbolic move because slowing economy and capital-outflow pressures may delay FX reforms, Fiona Lim, senior FX analyst, says in phone interview
- SDR inclusion will improve “rationality” in investment and assets allocation, which will improve financial stability
SocGen:
- Any positive reaction on yuan’s possible inclusion in IMF reserves to be short-term, given that the outcome was well priced in, says Jason Daw, head of Asia currency strategy at Societe Generale SA in Singapore.
- Being added to SDR unlikely to speed up the pace of reserve diversification into Chinese assets, Daw says in Nov. 14 e- mail interview
- “We continue to see an upward bias to USD/CNY over the coming months and expect it to reach 6.80 by mid-2016.”
My own view is that inclusion in the basket is a clearly bearish development for the yuan. More monetary easing is coming to China and with its newly minted reserve currency, China need to not worry quite so much about the international political backlash against the falling yuan. I still expect that, like most everything in China, the devaluation will be a measured glide slope but it has become even more likely.
