Nov 30, 2015 (LBO) – The International Monetary Fund may soon label China’s yuan as a reserve currency that could pressure China to reform currency management and improve communication with the rest of the world.
The IMF is expected to say that next year it will add the yuan to the basket of currencies that comprise its lending reserves, according to the Wall Street Journal.
This status is enjoyed by the U.S. dollar, the euro, the British pound and the Japanese yen.
With this move promises by China to loosen its grip on the currency and open its financial system will come under new scrutiny.
“We will have to build up confidence in renminbi assets from investors both at home and abroad and at the same time, prevent the financial risks associated with a more global currency,” said Sheng Songcheng, head of the survey and statistics department at the People’s Bank of China.
“That calls for carrying out various financial reforms in a coordinated way.”
In the past six months, the PBOC surprised markets with a currency devaluation and stood silent during a Chinese stock-market rout.
An immediate challenge is to deal with market pressure to weaken the yuan due to China’s slowing economic growth after three months of trying to strengthen it.
PBOC advisers say it will likely allow a gradual and modest depreciation of the currency of between 3 percent and 5 percent in the next 12 months. The challenge is how to clearly signal intentions to the market.
The IMF is expected to approve inclusion when it meets on Monday.
While IMF inclusion is largely symbolic, it could open Beijing to criticism of its financial policies when the fund conducts its five-year review of the currencies in its basket.
Formally, inclusion would add the yuan to the IMF’s special drawing rights, or SDRs, a virtual currency IMF uses for emergency lending to its members and countries can use to bolster their reserves.
“The actual inclusion of the yuan in the SDR is a nonevent for most investors. The sound you’ll hear is a collective yawn,” said David Loevinger, a managing director at fund manager TCW in Los Angeles and a former U.S. Treasury official focusing on China.
“The lack of data and policy transparency remains a risk for investors.”
In the near term, inclusion would lead to a modest, less-than-$30 billion in new foreign demand for yuan-denominated assets, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences.
“Domestically, it’s far from certain whether the SDR status could force other, structural overhauls,” Mr. Zhang said.