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IMF Seen Approving Yuan As "Reserve Currency"

Several days ago, Citi announced that it "expects the upcoming IMF review (scheduled for early-November) will probably lead to China’s inclusion in the SDR basket from late-2016. But we expect that the CNY will over time weaken versus the USD either way — either because of a poor outcome from SDR review or (if China joins the SDR) because of gradual (and limited) FX liberalization."

While it remains to be seen just how negative the impact on the CNY would be as a result of any possible SDR inclusion, and the definition of China's currency as a reserve currency, it now appears virtually assured that the IMF will include the CNY in its SDR basket, "validating efforts by President Xi Jinping to push through policies aimed at making the world’s second-biggest economy more market oriented, boosting China’s prestige as it prepares to host Group of 20 gatherings next year."

Just a few short weeks after The IMF appeared to snub China by delaying its decision on Yuan inclusion in the SDR basket, Bloomberg reports that Otaviano Canuto, executive director at the IMF for 11 countries including Brazil, said "prospects for approval seem to be favorable," adding that the story "is going in the direction of the renminbi becoming a necessary component of the SDR." China is taking that as a 'yes' and is preparing statements celebrating IMF SDR approval.

Per Bloomberg:

International Monetary Fund representatives have told China that yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter.

 

IMF has given Chinese officials strong signals in meetings that yuan is likely to win inclusion in current review of Special Drawing Rights, said three people who asked not to be identified because talks were private

 

Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people

 

Board has requested that IMF staff members look into some operational challenges of including yuan in the basket, such as ability of fund’s 188 member nations to quickly convert SDRs into yuan, according to another person familiar with the matter.

 

“We realize that although we’ve done a lot, it’s really first up to the staff, and second up to the board, to make a final judgment,” Jin Zhongxia, China’s representative to the IMF executive board, said in interview Friday. “We have to fully respect their decision”

As one analyst notes, “I think a political decision has already been made,” said Domenico Lombardi, director of the global economy program at the Centre for International Governance Innovation in Waterloo, Ontario.

“The Chinese have invested considerable political capital. They’ve mobilized their intellectual and political resources to this purpose, and it’s a case that’s difficult to argue against.”

* * *

“The most probable outcome is the board will vote to include the renminbi in the SDR basket,” said Meg Lundsager, who served as the U.S. representative on the IMF’s executive board from 2007 to 2014. “I really haven’t heard any big opposition. If there were countries which had real problems with it, they would have been raising their concerns.”

 

The U.S. took a step toward backing China’s SDR bid last month, when it softened its insistence that the Chinese implement financial reforms to win support. The U.S. now says it will support inclusion of the yuan if it demonstrates it meets the IMF’s technical criteria.

 

“This is going to make it very hard for the Chinese to undo a lot of these reforms,” said Lundsager, now a public-policy fellow at the Woodrow Wilson International Center for Scholars in Washington. “Once you move into this group of major currencies, it becomes pretty much impossible to backslide.”

The bottom line is that the "internationalization" and an increasing free float of the Yuan is bearish. And since the currency urgently needs even more devaluation as today's PBOC rate cut confirmed, this may just be the IMF's way of greenlighting even more devaluation for China's currency. And since any devaluation would lead to a surge in capital outflows, what the IMF is doing is merely blessing the Yuan's weakness while pretending it is in a position of strength, in an attempt to slow down the capital outflow as much as possible.

China's offshore Yuan has plunged to 1-month lows in the last few days (and decoupled - for now - from the onshore market suggesting outflows are accelerating)