The yuan has been one of the best performing Asian currencies in the first half against the US dollar and may continue to maintain its current strength for the rest of the year as Beijing tries to internationalise the currency. The government is keen to keep the yuan stable even if that means allowing it to strengthen against almost all other currencies as they weaken against a strong dollar, denting Chinese export competitiveness. A stable currency boosts incentives for foreign trading and investment entities to choose yuan in their transactions, a key indicator in the technical assessment by the International Monetary Fund in its review of the Special Drawing Rights (SDR) basket - an elite club of currencies Beijing wants the yuan to join this year. In the first half, onshore yuan weakened less than 0.1 per cent while the US dollar index gained more than 4 per cent. Offshore yuan strengthened 108 pips against the greenback in the first six months. The gap between rates averaged at 48 basis points in the first half, almost unchanged from the 47 in the second half of last year. "At this point, because the SDR review is still hanging in the air, there are some sacrifices as the currency is stronger than the regulators had desired," said Christy Tan, head of markets strategy, Asia, at National Australia Bank. The IMF has sent a team to Beijing to conduct a technical assessment of the yuan's eligibility to join the SDR basket. The review will be concluded this year. The multilateral fund has formally changed its view on the yuan exchange rate, saying the currency is no longer undervalued and that it is working closely with China on SDR inclusion. This was followed by a G7 finance ministers' meeting on May 29 which agreed "in principle" to add the yuan to the SDR currency basket. "There is a delicate balance that the Chinese government needs to strike. Because in an environment of the dollar strengthening and other currencies weakening against the dollar, a stable CNY could reflect currency strength but which of course would not help on the export front," Tan said. "After the IMF review, the CNY will be allowed to follow the market closer than it is doing right now." Citing a similar reason, Credit Suisse recently raised its forecast for yuan to around 6.20 in the coming months, from the previous forecast of 6.29 in three months and 6.33 in 12 months - a 1.3 per cent and 1.9 per cent depreciation respectively from its current level. The nation is launching the first phase of a globally centralised payment system by the year-end. The so-called China International Payment System will need a stable currency to encourage offshore trading partners to boost trading volumes. More importantly, capital outflow is something Beijing does not want to see, lending weight to a stable yuan. "We believe the overall impact on the direction of the RMB is muted as policymakers have timed capital account liberalisation to promote two-way flows," said HSBC foreign exchange analyst Ju Wang.
