Managed float to continue for Chinese yuan despite milestone IMF decision
Transition towards a free float will be a gradual, long-term process, says deputy central banker Yi Gang on yuan’s accession into IMF elite
Mainland China’s central bank has moved to assuage concerns that depreciation of the Chinese yuan is in the cards in the wake of a milestone decision by the International Monetary Fund to give the currency reserve status recognition.
People’s Bank of China deputy governor Yi Gang told reporters on Tuesday （that the current controlled float exchange regime will continue, while pledging to transition towards a “clean float”, or a free float mechanism in the future.
“Our long-term goal is a clean float, which entails little intervention. But under the current managed float mechanism, we have to intervene at times to stabilise the market,” Yi said.
The IMF on Monday approved the yuan, also known as the renminbi, to be the fifth currency after the US dollar, Euro, British pound and Japanese yen in the SDR basket, a quasi-currency that functions as an accounting unit of the IMF, as well as claims and denomination of IMF credits to member countries.
The verdict is seen as an acknowledgement of China’s heft in the global economy, and will give top brass in Beijing further incentive to press ahead with financial and capital account liberalisation.
But it is not seeing triggering any immediate demand from foreign investors, both public and private, to hold yuan-demoninated assets.
The PBOC has been seen as a heavy hand in markets to stabilise the exchange rate over the past few months, after a fixing mechanism change in August that resulted in a 3 per cent devaluation which shattered market confidence that the currency was a one-way upward bet.
The offshore yuan depreciated as much as 240 basis points or 0.4 per cent to 6.4488 to the dollar as of 7 p.m. Hong Kong time on Tuesday following the IMF verdict. The onshore yuan settled at 6.3988, having barely moved over the past week.
The yuan has been toiling under a depreciation bias given a barrage of weaker major currencies. It has gained 14 per cent from mid-last year on a real effective exchange rate basis, a gauge of a currency’s valuation against a group of peers after netting out inflation, according to Bank of International Settlement data.
“After RMB inclusion in the SDR basket, we think it is likely the PBOC will gradually step away from FX intervention to allow for a more market-determined exchange rate, and regain control over its monetary policy as capital flows become larger on liberalisation,” said Nomura analysts.
They estimate the yuan to trade at 6.75 against the US dollar by the end of 2016, or a 5 per cent depreciation from the current level.
Professor Frank M Song at the University of Hong Kong said the PBOC had to reinforce market confidence at such a critical juncture.
“Re-emphasising a managed float is another way to assure investors at home and abroad that the currency is not on track for sudden depreciation,” he said.
“Theoretically, a clean float means no government intervention, which is a very ideal situation. Only until the capital account is fully convertible and the domestic financial markets are sophisticated enough will a country move towards a clean float. In reality, only a few currencies, including the dollar, euro, pound and yen, are free float,” he said.
Despite the constraints and immaturity in China’s financial and foreign exchange regimes, the IMF gave the yuan greater weighting than that of the pound and the yen, both accounting for bigger shares in global reserves.
The IMF nod also means it considers the yuan to be “freely usable”, a contentious criteria that made the currency miss the cut when it first applied to join the basket in 2010.
Over the next few years, the yuan is expected to snap up a 5 per cent share in global reserves, according to UBS China economist Wang Tao.
“This would translate into approximately US$450 billion of capital inflows into China. Although such amount will not be enough to offset the capital outflow during the same course,” she said.