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China's yuan prepares for global currency status as questions on reform linger
September 30, 2016 / 6:26 AM / 10 months ago

China's yuan prepares for global currency status as questions on reform linger

SHANGHAI, Sept 30 (Reuters) - China's yuan will formally join the U.S. dollar, the euro, the Japanese yen and the British pound as a global reserve currency on Saturday, in a key milestone in the country's long campaign to boost its clout on the global stage.

The yuan, also know as the renminbi or "people's money", will be officially added by the International Monetary Fund (IMF) to its currency basket as the Communist Party celebrates the founding of the People's Republic of China in 1949.

The move itself is not expected to move financial markets much, as it was announced last year, but it will put Beijing's often opaque economic and foreign exchange policy increasingly in the international spotlight as central banks add yuan assets to their official reserves.

China stunned markets by devaluing the currency last year and has since allowed the yuan to weaken to near six-year lows, adding to worries about already feeble global growth.

Some China watchers also fear that Beijing's commitment to further market opening and financial sector reforms will fade after its diplomatic success.

U.S. Treasury Secretary Jack Lew stressed that risk on Thursday, saying the yuan is still "quite a ways" from true global reserve currency status. While recognizing "enormous" change in China in the last 10 years that had made the currency more open, Lew said the government still had work to do.

"Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency," he said, referring to the "special drawing rights" basket that forms the IMF's unit of account.

To be sure, China has continued liberalising sections of its domestic markets, including opening up its interbank bond market to all "medium and long term" investors in February.

But many analysts feel the overall reform agenda has lost steam, as the government becomes more concerned about steadying the economy after growth last year slowed to a 25-year-low.

"The renminbi's SDR status confirms the recognition by the international community of China's economic ascendancy and structural reform efforts. This should act as an external force and a confidence booster for China to push for more reforms," Chi Lo, Senior Economist for Greater China at BNP Paribas Investment Partners in Hong Kong, wrote in a note.

"However, it seems this strategic importance has faded as Beijing has downgraded the priority of structural reforms since the IMF board decision last year in exchange for upgrading GDP growth as the top policy priority."

Many Questions

Unlike other currencies in the IMF's global basket, the yuan remains highly controlled.

Questions also remain on how China manages its value, despite repeated pledges to give markets more influence in the daily fixing by the central bank. Spot trading in the currency rarely deviates much from that morning midpoint rate.

Traders say state banks still sometimes intervene on behalf of the central bank to support the currency when it moves too sharply.

While authorities are widely suspected of steadying the currency ahead of a summit of G20 leaders in China in September and the Oct. 1 SDR inclusion, downward pressure remains.

Earlier this year, Reuters reported that Chinese policymakers would tolerate a fall in the yuan to 6.8 per dollar in 2016, which would mean a 4.5 percent fall for the year.

The yuan is currently at 6.67 to the dollar, 2.7 percent weaker than at the beginning of the year.

"The inclusion of the renminbi in the IMF's SDR will have minimal impact on foreign demand for renminbi assets and therefore offers little support for the Chinese currency," Capital Economics said in a note this week.

"If anything, the risk is that official intervention to keep the renminbi stable ahead of its inclusion will subsequently be paired back, allowing for renewed deprecation."

The SDR was originally envisioned as a possible alternative reserve currency to the dollar, but it has struggled to gain traction over the past several decades despite widespread dissatisfaction with the dollar's dominance. (Reporting By Nathaniel Taplin; Editing by Kim Coghill)

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