China’s currency, the yuan/renminbi, fell further this week after the International Monetary Fund dealt a setback to the currency’s role on the global stage.
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The IMF pushed back the date that the yuan would be added to the IMF’s basket of reserve currencies, known as the Special Drawing Right currencies. Originally scheduled to become a reserve currency at the end of December, the yuan will now have to wait until at least September 30, 2016.
Yuan to dollars over the last four years. Graph: Marketwatch.
The IMF said in a release that the postponement would allow “the continued smooth functioning of SDR-related operations and responds to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year.”
Could it be possible that the IMF is having its own reservations about using the yuan/renminbi as a reserve currency after the big government devaluation last week? The international banking institution would certainly have good reason.
Banks Trading Dollars for Yuan
On Thursday, China’s central bank, defying market sentiment, set the daily reference rate for the yuan, or “fix,” stronger than in previous days at 6.3915 per US dollar. That’s 0.08% stronger than the level set a day earlier.
In early trade the currency fell. Traders cited large, state-owned banks selling US dollars, which sent the yuan sharply stronger midday and 30 minutes before it closed.
Cheaper Chinese imports dragging down inflation could mean a stronger dollar.
“It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policy makers, and by extension the near-term direction of the [yuan],” analysts from Goldman Sachs wrote in a note earlier this week.
IMF Fires Still Burning
Being recognized as a reserve currency would have been a symbolic win for China’s currency and for the central bank’s policy makers on the global stage, but with the currency now purposely devalued to its lowest point in three years and construction demand for metals and other commodities in China still falling, perhaps the last two weeks have been a wake up call to the IMF.
Maybe they really did plan this all along. The IMF has other problems, after all, with Greek Prime Minister Alexis Tsipras stepping down and calling for new elections there, a situation that could bring Greece’s debt woes back onto the IMF’s front burner.
Adjusting to a Possible Reserve Yuan
In its release, the IMF stated that “the extension (to naming another currency to SDR status) would also allow users sufficient lead time to adjust in the event that a decision were to be taken to add a new currency to the SDR basket.”
This adjustment period might be as good for users of the yuan as it is for the IMF, as the Chinese economy will have more than a year to recover by the time it’s eligible to join the SDR basket.
It is certainly riskier today to invest in yuan/renminbi assets than it was just last week. Still, the lower costs of these investments will, no doubt, open up investment opportunities in bonds and, if the economy gets back on track, Chinese construction.
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Here in the US, the Federal Reserve is still taking a cautious approach to raising interest rates and a weaker yuan/renminbi will mean even cheaper Chinese goods flowing into US ports creating another reason for the Fed to hold off on raising rates in the short-term. Beijing’s move could actually slow US inflation.
The yuan’s loss, could be the dollar’s gain.