19 September 2019
Adding the yuan to the IMF's currency basket leaves economic conservatives better positioned to resist further significant reform. Photo: Bloomberg
Adding the yuan to the IMF's currency basket leaves economic conservatives better positioned to resist further significant reform. Photo: Bloomberg

China reforms may slow after IMF’s yuan inclusion

The International Monetary Fund is expected to officially announce on Monday the addition of the Chinese currency to its reserves basket, an acknowledgement of the renminbi, also known as yuan, as a major global currency alongside the dollar, euro, yen and pound.

By doing so, the IMF board is endorsing China’s efforts to reform and further open up its economy while hoping to spur fresh change in the country.

But after the endorsement, reforms may not continue at the breakneck pace of recent months, Reuters said, citing Chinese policy insiders and international policymakers.

Chinese sources suggest adding the yuan to the IMF’s currency basket leaves economic conservatives better positioned to resist further significant reform.

A slowing in the pace has implications for those who bet that making the renminbi a global reserve currency will give it a boost.

The yuan has fallen almost 3 percent against the dollar this year, on course for its biggest annual fall since its landmark 2005 revaluation.

The IMF decision will remove a key incentive – bolstering national pride – that reformers used to push otherwise reluctant conservatives to support reforms.

More importantly, however, are worries in Beijing that the rickety economy can’t handle more aggressive reform that allows a freer flow of currency across China’s borders.

Beijing is already rapidly losing a taste for more experimentation with capital flows, Reuters quoted the sources saying.

The yuan jumped in offshore trade on Monday on suspected intervention by Beijing.

The offshore yuan rose to 6.4345 to the dollar after hitting a 2-1/2-month low of 6.4591 earlier.

The yuan has been hampered by speculation among some analysts that Beijing may allow the yuan to depreciate soon after its admission and may feel less pressure to push through promised reforms.

Mainland Chinese shares were fragile, sliding 3.2 percent at one point, after posting their biggest one-day losses in more than three months on Friday.

Market sentiment remained shaky due to the resumption of IPOs, renewed efforts by the securities regulator to clamp down on leveraged buying and concerns about the cooling economy.

After the stock market buckled more than 40 percent in the summer – which many blamed on nefarious foreign capital – regulators have made it harder for money to leave China to counter yuan selling pressure and have intervened heavily in onshore and offshore currency markets.

Not just conservatives, but more liberal economists are calling for a pause.

“Our ability to control financial risk has yet to be improved,” said a senior economist at the China Center for International Economic Exchanges, an influential Beijing think-tank.

“Any rush to open up the capital account completely could be unfavorable for controlling financial risks … we will definitely be very cautious.”

The IMF’s executive board, representing the Fund’s 188 members, is likely to approve inclusion of the yuan in the reserve basket, known as Special Drawing Rights (SDR).

An IMF staff report and managing director Christine Lagarde have endorsed the idea. The United States has suggested it will not stand in the way.

The SDR basket determines the currency mix countries like Greece receive when the IMF disburses financial aid.

Some economists predict inclusion will boost demand for the yuan by more than US$600 billion.

Chinese media predicted entry will draw over 1 trillion yuan (US$156 billion) of foreign money into China bonds. Both predictions rest on assumptions more capital account opening is on the way.

China has pushed to make the yuan more international, setting up swap arrangements with countries so trade can be settled in the currency and China has said it will push ahead with financial reform. It has widened the yuan’s trading band and this year went a long way to freeing up interest rates.

But Chinese policy advisers have always been divided, sometimes publicly, on how far China should go in opening up its borders to foreign capital; while few use vocabulary that rejects general reform principles, many domestic policy advisors – including some otherwise supportive of economic liberalization – warn throwing open the gates to cross-border flows would be destabilizing.

They have many quiet allies among China’s state-owned banks and other inefficient industries, which fear that a freer market for capital will expose them to international competition and put them out of business.

Foreign access to financial markets is still tightly restricted and of late regulators have reversed some measures that were designed to make it easier to move the yuan offshore.

“The [Chinese] reform camp has been selling [IMF inclusion] partly on the basis of international prestige, in particular equaling Japan,” said Derek Scissors, chief economist at China Beige Book.

“What is the reform movement going to say now to move reform forward … if the IMF has already recognized China as an internationalized currency?” asked Scissors. “Why would you take more risks?”

Some see parallels with China’s WTO entry in 2001, in which Chinese reformers used entry negotiations as an incentive to push through painful state sector restructuring, only to see their agenda sidelined shortly after inclusion.

China’s retreat from its WTO commitments was widely blamed on the retirement in 2003 of reform-minded Premier Zhu Rongji.

Current leading reformer Zhou Xiaochuan, the head of the central bank who has said the yuan will be basically convertible by this year, is at 67 years old already past the typical retirement age for senior Communist Party officials.

“Previous wording was ‘accelerating’ convertibility, now it’s ‘making RMB convertible in an orderly manner’,” said an economist, of the China Academy of Social Sciences.

He said China was well aware capital account liberalization elsewhere – in particular Japan – has been blamed for causing “serious crises”.

“The most important thing is to handle domestic issues well; we cannot afford to see another collapse of the stock market.”

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