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Yuan steadies ahead of its entry into SDR
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CHINA’S currency moved slightly yesterday with banks offering ample dollars to meet demand from companies for greenback just days before the yuan is included into the International Monetary Fund reserve basket.
Traders told Shanghai Daily that the government wants to see yuan traded within a narrow range of guidance rate when it is about to officially enter the IMF’s reserve basket, known as Special Drawing Rights, tomorrow.
The spot market of yuan opened at 6.6724 yuan per dollar and was changing hands nearly around the midpoint of 6.6700 set by the People’s Bank of China yesterday.
Chinese market will be closed for seven days starting tomorrow for the National Day holiday.
“The recent fluctuation of yuan reflects the consideration of SDR inclusion,” said a trader at a foreign bank in Shanghai. “There are a lot of dollar offerings on the market to hedge dollar buying that could lead yuan to fast depreciation.”
Twice this year, the overnight cost of borrowing the offshore yuan in Hong Kong surged above 20 percent amid speculation the PBOC mopped up liquidity to boost the exchange rate.
Though the central bank last week denied it intervened in the trade of yuan, traders preferred to wait and watch as the rate was still under PBOC guidance.
The yuan will have a 10.92 percent weighting in the basket after October, behind the euro and the US dollar. It is the first addition since 1999. There were 204.1 billion SDRs as of March this year, equal to around US$285 billion.
Though yuan joining the SDR won’t have a direct impact on global financial markets, the inclusion underlines the recognition of Chinese market’s importance to global economy, and the potential wider use as reserves and transactions in financial market, JPMorgan’s economist Zhu Haibin said.
Singapore-based DBS Bank estimates that yuan will comprise 4 percent of global reserves, similar to that of Japanese yen in three years’ time. That means US$440 billion out of some US$11 trillion of global reserves could be allocated to yuan assets.
SDR inclusion marks a milestone in China’s efforts to promote the yuan’s global profile, but Eswar Prasad, the author of “Gaining Currency,” argued: “China needs to carry out a broad range of reforms, both economic and political, before the yuan can become a truly global currency on par with the dollar.”
The former top China hand at the IMF told Wall Street Journal that China was in a “grand experiment” between two contradictory impulses — “more freedom for market forces but with a heavy dose of government intervention.”
“Whatever happens with the yuan’s prominence on the world stage, such reforms are good for the Chinese economy,” Prasad told the newspaper.
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