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Yuan

China’s yuan set to become the only IMF reserve currency that isn’t fully convertible

The inclusion of the yuan in the IMF’s basket of reserve currencies is unlikely to change Beijing’s timetable for loosening control over the currency, analysts say

PUBLISHED : Friday, 30 September, 2016, 4:31pm
UPDATED : Friday, 30 September, 2016, 10:57pm

China’s yuan is poised to join the ranks of the US dollar and other major currencies in the rarefied club of reserves held by the International Monetary Fund from October 1.

But there’s one extraordinary difference that will set the Chinese currency apart: The yuan is the only member of the elite currency group that isn’t freely convertible, with official trade limited to within China and the offshore trading hub of Hong Kong.

Analysts believe that China will likely retain its firm hold on the currency for years to come.

King International Financial Holdings chief executive Jasper Lo sees changes on the distant horizon. But he along with other analysts say that China will likely free up its currency in a gradual process that could take between five to 10 years.

“The British pound has dropped 12 per cent intraday and closed 8 per cent lower in a single day after the Brexit vote. If the yuan is fully convertible, the People’s Bank of China would need to be well prepared for that to happen and I do not think Beijing is ready for at least another five years,” Lo said.

Ahead of its entry into the IMF’s Special Drawing Rights basket, China took a number of important steps to liberalise trade in the currency. Among them were changes in 2009 which permitted international investors to use the yuan to settle trade and invest in the country.

Lo said Beijing remains concerned about capital outflows and would likely return to the issue of freeing up trade in the currency when the economy is doing better.

“The yuan is now on a depreciating trend against the US dollar while the mainland Chinese economy has seen its growth rate slow. Full convertibility of the yuan at current market conditions would lead to a massive outflow of capital,” Lo said.

Gordon Tsui Luen-on, managing director of Hantec Group International Finance, believes it will take 10 years for Beijing to let the yuan to become fully convertible.

“Beijing is moving in the direction of allowing the yuan to become fully convertible. After joining the SDR basket, we will see more international usage of the yuan and this will encourage Beijing to relax more on the trading of yuan in the coming years,” Tsui said.

“Beijing always likes to carry out any reform slowly. The mainland regulators and investors will take time to get used to the concept of the yuan becoming fully convertible as this means the currency may have bigger volatility,” Tsui said.

Andrew Fung, executive director of Hang Seng Bank, said he does not think SDR admission will quicken the pace of full convertibility.

“Capital account reform is more based on the stage of development of economic, international balance of payments, as well as social and political conditions,” Fung said.

Brett McGonegal, the chief executive of Capital Link International, said the inclusion of yuan in the SDR basket will certainly help the path to full convertibility of the currency but said this would not be the major driver.

“Full convertibility, liberalisation and globalisation are all goals for the future development of the yuan but that may be defined with a long timeline,” McGonegal said.

“What the focus should be here is the continual opening up and delivery by the government to loosen control and open up the markets on all fronts. The IMF has initiated and welcomed the entrance of the currency thus validating the current execution schedule by the State Council and PBOC,” he said.

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