China’s yuan loses ground after milestone IMF reserves inclusion

In offshore trades, the yuan was weaker in the wake of the landmark IMF decision

PUBLISHED : Tuesday, 01 December, 2015, 11:38am
UPDATED : Monday, 27 June, 2016, 11:51am

The Chinese yuan has depreciated in the wake of a milestone decision by the International Monetary Fund to include the currency in an elite group.

Offshore yuan (CNH) depreciated by over 150 basis points, or 0.24 per cent, to 6.4413 per US dollar in the early hours of Tuesday, shortly after the IMF announced that it would include the currency in the Special Drawing Rights (SDR) basket, and give it a weighting greater than the Japanese yen and British pound.

The decision, effective October 1 next year, is “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” IMF managing director Christine Lagarde said in a statement.

The yuan has been given a weighting of 10.92, placing ahead of the British pound at 8.09, and Japanese yen at 8.33, though trailing the euro at 30.93 and US dollar at 41.73.

In offshore markets the yuan later rebounded to 6.4369, with the onshore yuan was trading slightly weaker at 6.3982. The People’s Bank of China set the midpoint at 6.3973, 11 basis points weaker than yesterday. The gap between the two stands around 400 basis.

“The IMF decision is a historical event. Since the SDR is an international reserve asset created by the IMF to supplement member countries’ official reserves, today’s decision means that the RMB becomes a globally recognisable reserve currency,” ANZ said in a report.

It is the first time that the SDR basket, created in 1969, has enlisted a new member since 1999 when the euro was born and its weighting was consolidated from that of the German mark and French franc.

Yet, the decision doesn’t immediately herald more reserve holdings in yuan, also known as renminbi, by foreign central banks.

“Being a part of the SDR basket is not a sufficient condition for the renminbi to be considered a reserve currency, nor will it necessarily result in a sudden spike in the allocation of reserves to renminbi assets. Notably, other currencies such as the Canadian dollar and Australian dollar are currently held more widely as central bank reserve assets without being a part of the SDR basket,” Fitch Rating said in a note.

“Furthermore, renminbi-denominated assets do not currently qualify as foreign reserves according to the IMF - despite the inclusion of the renminbi in the SDR weighting - because of China’s capital controls,” Fitch said.

The offshore yuan weakness is in tandem with a stronger dollar and the depreciation of the pound and euro overnight.

The dollar index, a gauge of its value against its peers, jumped to an almost nine-month high of 100.170 last night. The euro to 1.0563 per dollar, the lowest level since March 16, while the pound dollar sank below 1.5 per dollar for the first time since April 21.