Thursday, 3 December 2015

IMF gives Chinese yuan Special Drawing Rights status

Demand for yuan set to rise in wake of IMF decision
Its recognition as a global reserve currency could be game-changer for world markets
By Grace Leong, The Straits Times, 2 Dec 2015

China has reached an economic milestone with the International Monetary Fund's (IMF) decision yesterday to recognise the yuan as a global reserve currency.

The step is both symbolic and a potential game-changer for global markets, including Singapore, the largest offshore yuan centre outside Hong Kong.

Having the yuan included in the IMF's Special Drawing Rights (SDR) basket is an important sign that the currency is seen as a safe asset but the move could have practical benefits by boosting demand for it in trade transactions and investment.

The Monetary Authority of Singapore (MAS) welcomed the move and said it was a "momentous and positive development for the international monetary system and reflects the growing use of the yuan as an international payments currency for trade and investment".

MAS said it looked forward to further strengthening cooperation to help foster a resilient and thriving yuan ecosystem in the region.

Singapore businesses can expect it to be far easier to make direct China-Singapore trades in yuan, given that China will likely further expand on the "freely usable" aspect of the currency, said Mr Zhang Weiwu, general manager of Industrial and Commercial Bank of China (Singapore). To be included, the yuan must be widely used to make payments for international transactions and widely traded in the main exchange markets.

Singapore companies can use the yuan in their trade settlements, and financing and investment activities to help save on transaction costs, hedge against exposure in China as well as reduce their forex risk, said Mr Ben Chan, UOB head of yuan solutions.

The IMF move has sparked more interest among local manufacturers like Tai Hua Food Industries. Mr Thomas Pek, Tai Hua's managing director and president of the Singapore Food Manufacturers' Association, said he is considering shifting his firm's invoicing to yuan to facilitate imports as well as sales of his soya sauce products to China.

Mr Pek said: "I won't have to use the US dollar or Singdollar to buy yuan to pay for imports from China. That is very inconvenient.

"We will also be quoting our exports in yuan, as opposed to quoting in Singdollar, which has strengthened against the yuan, making our products less competitive in China."

Mr Sam Vilo, head of Standard Chartered Bank's financial markets Singapore, said he sees further developments, including flexible cross-border investments and remittance, expansion of free trade zones and greater opening up of capital accounts.

But Mr Andrew Colquhoun, senior director, sovereigns, Fitch (Hong Kong), warned: "The speed at which the yuan develops into a global reserve currency will depend on the extent to which central banks and sovereign wealth funds begin to see the currency as a viable store of liquidity and value to rival that of the US dollar."

Reforms key to success of yuan's internationalisation
The Straits Times, 2 Dec 2015

BEIJING • The International Monetary Fund's recognition of China's currency is a step towards encouraging its global use, but banks will remain reluctant to hold yuan unless Beijing pushes deeper financial reforms, analysts say.

Monday's inclusion of the yuan in the Washington-based institution's elite reserve currency basket is a symbolic victory for Beijing.

The yuan is the fifth most widely used currency in global payments but accounts for less than 3 per cent of transactions. That compares with over 43 per cent for the US dollar, and nearly 29 per cent for the euro, global transactions organisation Swift said in October.

Analysts believe the impact of the IMF's decision on foreign exchange markets will be muted, though it will encourage central banks to speed up diversification of their currency reserves by buying yuan.

"There is no obligation for central banks to align their forex reserve holdings with the SDR (special drawing rights) basket but, in practice, they pay a lot of attention to the basket's composition and weights," said Mr Dariusz Kowalczyk, emerging market strategist at Credit Agricole. He forecast an annual buying of US$110 billion (S$155 billion) worth of the yuan.

However, such a development depends on reforms undertaken by Beijing, including opening its tightly-controlled onshore financial market, allowing more capital outflows and widening the trading band for the yuan, ANZ Banking Group said.

The People's Bank of China (PBOC) holds virtually all yuan reserves under swap agreements rather than as physical currency, which gives it control over its pricing. This firm grip on the yuan undercuts investors' emphasis on size, stability and liquidity when investing in reserve currencies.

The yuan can now only move up or down 2 per cent against the US dollar from a mid-rate set daily by the PBOC.

"Central banks... invest the bulk of their funds in currencies which are fully convertible and for which there are deep and liquid markets for foreign exchange, bonds and derivatives," said Mr Andrew Kenningham of Capital Economics.

Despite slowing growth, China has moved gradually to implement economic reforms, liberalising interest rates in October and pledging to move towards making the yuan fully convertible by 2020.

Analysts say such liberalisation is likely to lead to falls in the yuan's valuation, but Beijing is far from allowing complete liberalisation in order to avoid larger falls.

DBS Group's Nathan Chow said: "China will have to strike a balance between letting the market play a bigger role and not allowing any major depreciation."


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