IMF's yuan inclusion signals less risk taking in China

Sun Nov 29, 2015 8:28pm EST
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By Pete Sweeney and Krista Hughes

SHANGHAI/NEW YORK (Reuters) - When the International Monetary Fund agrees on Monday to add the Chinese yuan to its reserves basket in the biggest shake-up in more than three decades, the IMF can afford itself a congratulatory nod.

By acknowledging the yuan as a major global currency alongside the dollar, euro, yen, and pound, as is widely expected, IMF members will endorse the efforts of China's economic reformers and by doing so hope that will spur fresh change in China.

But Chinese policy insiders and international policymakers say reforms may not continue at the breakneck pace of recent months. In addition, Chinese sources suggest adding the yuan to the IMF basket leaves economic conservatives better positioned to resist further significant reform in a reminder of the period following China's entry to the World Trade Organization (WTO).

A slowing in the pace has implications for those who bet that making the yuan 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, say the sources - economists involved in policy discussions who declined to be identified because of the sensitivity of the subject.

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.   Continued...

A customer counts Chinese Yuan notes at a market in Beijing, August 12, 2015. REUTERS/Jason Lee