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
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.