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China: Market focus on IMF's SDR decision on Yuan - BBH

FXStreet (Delhi) – Research Team at BBH, suggests that it seems like a forgone conclusion now that the IMF will include the yuan in the next configuration of the SDR, which will be implemented in September 2016.

Key Quotes

“Assuming this is a reasonable surmise, then the real question is about the weighting of the yuan. This is very much unknown in part because, as the IMF is the first to admit, it is not a mechanical decision. There is a large judgment component. The literature suggests the IMF's own approach has been evolving toward more weight on capital markets than the market for goods (exports). Also, the other currencies in the SDR are substantially more accessible and used than the yuan.”

“If just relying on China's exports, the IMF staff suggested in the summer, a weighting of 14-16%. Many observers seemed to have taken this illustration out of context, and this became the rough consensus of what will be announced.”

“We are less sanguine. From China's point of view, the key now is getting in, not the weight. That is where there is scope for compromise with those who think that yuan is not seasoned sufficiently, and much more work has to be done to increase the role of markets in setting key elements of the price of money in China. Also, there is some discomfort with the light capital controls that China has imposed to deter capital outflows.”

“We expect the market impact to be minimal. We do not expect central banks to immediately begin buying yuan. Macroeconomic considerations still favor some depreciation in the yuan, though the large trade surplus and the shift away from manufacturing argue against a significant depreciation.”

“The gap between the onshore (CNY) and offshore (CNH) yuan is widened in recent days. The IMF had indicated over the summer that this was not desired. The gap has approached levels at which officials appeared to take indirect action. The may also be arbitrage opportunities for large Chinese banks.”

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