More financial reforms in store after IMF verdict, PBOC deputy governor pledges

PBOC said it remains important to reinforce the yuan’s inclusion in the IMF reserve currency basket

PUBLISHED : Tuesday, 01 December, 2015, 2:15pm
UPDATED : Tuesday, 01 December, 2015, 4:22pm

China will press ahead with financial and capital account reforms after the yuan’s inclusion in an elite currency club held by the International Monetary Fund, People’s Bank of China deputy governer Yi Gang has pledged.

“The [Special Drawing Rights] basket is reviewed every five years. Any currency can be included when criteria are met. Likewise, it can also be excluded when the conditions are no longer met,” Yi said in a press briefing on Tuesday morning.

The IMF approved the yuan, also known as renminbi, to be the fifth currency in the SDR basket, a quasi-currency that functions as an account unit of the IMF, as well as claims and denomination of IMF credits to member countries.

The verdict, which gave the yuan a heavier weighting than that of the Japanese yen and British pound, was the result of years of effort by the mainland central bank to steer financial reforms, including interest rate liberalisation, deregulation and opening-up in the domestic equity, bond and foreign exchange markets, and foreign exchange rate fixing.

“We have to bear in mind that we need to keep reforming and opening up, so the yuan’s status in the SDR basket can be reinforced,” Yi said.

“We will do more work to complete the foreign exchange mechanism... and increase product offerings in the capital market, providing more hedging tools to make our markets deeper and broader,” he added.

The yuan depreciated in the offshore market on the heels of the decision, as traders bet that the PBOC will dial down intervention and let the currency flow more freely.

The renminbi, or literally “people’s currency’, has been under downward pressure as other emerging markets currencies have fallen substantially in anticipation of a stronger US dollar this year.

But Yi said the fundamentals did not support constant depreciation of yuan, as China enjoys a large trade surplus, significant foreign exchange reserve as well as increasing foreign and outward direct investments.

“There is no need to worry about depreciation of the renminbi in the wake of the SDR decision,” said Yi, citing that the IMF paper on the inclusion raised no concern on the currency’s valuation.

The IMF said it would soon release the SDR review staff paper on which the decision was based to the public.

Yi added the next goal was to steer a smooth transition to a free floating currency regime.

He also dismissed misgivings that the PBOC’s policy will be complicated and less independent as the yuan strides towards a reserve currency status. “If anything, our monetary policy will be more stable, flexible and effective.”

Yi’s remarks seem to acknowledge market expectations that an inclusion does not immediately spell a reserve currency status, nor an immediate demand to hold yuan-demoniated assets from global investors.

“While the RMB is now officially a reserve currency per the IMF, China will need to pursue further financial reforms before the RMB becomes a larger part of global reserve holdings. Initial flows into RMB assets are likely to be minimal as a result of the decision but will increase over time as liquidity increases in China’s domestic bond, foreign exchange, and derivative markets,” said Alex Wolf, emerging markets economist at Standard Life Investments, which manages £250 billion (HK$2.9 trillion).

“This decision should be looked at as just one step of a broader trend of yuan internationalisation and not an end goal in itself,” he said.