New | Foreign exchange markets unfazed by IMF delay on yuan SDR inclusion
Some investors believe only technical issues stand in the way of yuan's SDR inclusion
The forex market was unfazed by the International Monetary Fund's (IMF) suggestions that the yuan's inclusion in its basket of reserve currencies might take longer than expected.
The IMF said "significant" work needs to be done before deciding whether the yuan should be added to the SDR (special drawing rights) basket. That could delay yuan's inclusion in the exclusive club of top currencies by nine months to September next year rather than January, as was widely expected.
On the implementation front, there are still a "lot of technical considerations to be made" before yuan could join the basket, said HSBC foreign exchange analyst Joey Chew.
For one, the review will require more data analysis on the market share of the yuan in global reserves and forex turnover. The weighting the Chinese currency will get in the basket in the event of its inclusion is also pending further discussion.
Moreover, if the yuan gets the green light, the IMF will need to determine which exchange rate and interest rate to use for China to determine the relevant rates for the SDR basket, Chew said.
"On a technical basis, two key remaining sticking points are that foreign companies cannot raise capital in the domestic Chinese equity or bond markets and that most Chinese individuals cannot invest overseas," said London-based BESI Research.
"The prospect of a nine-month delay being offered effectively indicates that the IMF is willing to include the RMB in this review, subject to these reforms being completed. This means inclusion in September 2016 looks likely, signalling the start of the global reweighting of capital to China," it said.
The foreign exchange market responded calmly to the report, with the onshore yuan strengthening 4 basis points, or 0.01 per cent, to 6.2097. Offshore yuan gained 14 basis points, or 0.02 per cent, to 6.2177.
HSBC's Chew said she would not change her forecast on the yuan - 6.26 against the US dollar by the year-end - after the IMF's decision.
"The IMF did not indicate in any sense that yuan is not joining the SDR and they have said before that it is 'a matter of time'. What we understand from the [new] statement is that the implementation to include yuan in the SDR basket could take a bit more time," she said.
"My guess is that there is still a good chance the RMB will be included in the basket in the coming review, no matter whether it takes place this year or the next."
Tommy Ong, managing director of treasuries and markets at DBS, however, sounded less optimistic.
"The current yuan rate has not priced in enough of the scenario of a rejection, or a delay of the review, or the IMF setting a number of conditions for yuan to join the basket. In those scenarios, there will be considerable selling pressure on yuan."
