FXStreet (Mumbai) – The International Monetary Fund’s (IMF) Executive Board will today discuss and decide on the proposal to include China’s yuan into the IMF’s Special Drawing Rights (SDR) basket. Chances that the currency will get included in the SDR basket are high as the US, which is the major investor in the fund as well as has the IMF’s Managing Director Christine Lagarde are in favour of the inclusion.
That Beijing had kept the yuan artificially low to help exporters is a major reason why the currency had earlier failed to meet the criteria for reserve currencies set out by the IMF.
Gap in offshore and onshore rates not favourable for yuan’s inclusion in the SDR basket
A number of Chinese banks today sold the dollar in the offshore market during in the early trading hours with an objective to support the currency in Hong Kong. Some investors rushed to buy the currency as they anticipate the IMF’s decision to be in favour of the yuan, leading to a surge in offshore yuan.
The IMF had stated in August that the rate in Hong Kong cannot be considered as a perfect hedge for onshore exposure given the offshore onshore difference. The difference between the offshore and onshore yuan arises from the restrictions that China imposes on cross-border capital flows. Considering this, the central bank must have today chosen to intervene to maintain rates as per IMF’s criteria.
PBoC’s intervention likely led offshore yuan to rebound
With the IMF poised to vote on the inclusion of yuan in the SDR, the offshore yuan today rebounded from early losses on prospects of central bank’s intervention to diminish the gap between the offshore and onshore yuan. According to Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd., “Chinese authorities will continue to keep the difference small after the IMF decision by supporting the offshore rate and allowing the onshore yuan to weaken.”
The yuan trading in Hong Kong surged 0.3 per cent against the dollar as of 9:47 a.m. in Hong Kong. It had traded 0.14 per cent weaker four minutes earlier. The gains were recorded after the discount to the onshore price widened the most since early September. This hampered China’s efforts to abide by the one rate at home and abroad policy of IMF. Following which the central bank probably stepped in to reduce this gap given that the IMF decision s around the corner.
Data compiled by Bloomberg showed offshore yuan moved up 0.32 per cent, to 6.4267 a dollar as of 4:45 p.m in Hong Kong, the most since Oct. 30. China Foreign Exchange Trade System prices showed that this is a 0.4 per cent discount to the onshore rate in Shanghai, which closed at 6.3981. The PBOC is known to have lowered its daily fixing by 0.07 per cent.
Stella Lee, president of Success Wealth Management Ltd. in Hong Kong believes the PBoC definitely played a crucial role in fixing the offshore onshore gap. She feels “Having two exchange rates would complicate the SDR calculations when the yuan is added”. China has been lobbying hard to include the yuan in the SDR basket. It had to intervene so that the two separate exchange rates does not ruin the possibility of the yuan’s SDR inclusion.
(Market News Provided by FXstreet)