By Lingling Wei
BEIJING--The International Monetary Fund is on the verge of
labeling China's yuan a reserve currency. Now Chinese officials
will have to prove they can treat it like one.
The IMF is widely expected on Monday to say that next year it
will add the yuan to its basket of reserve currencies, a status
enjoyed only by the U.S. dollar, the euro, the British pound and
the Japanese yen. The inclusion would represent recognition that
the yuan's status is rising along with China's place in global
finance.
Now comes the hard part. The inclusion puts new pressure on
Beijing to change everything from how it manages the yuan, also
known as renminbi, to how it communicates with investors and the
world. China's pledges to loosen its tight grip on the currency's
value and open its financial system will come under new
scrutiny.
"We will have to build up confidence in renminbi assets from
investors both at home and abroad and at the same time, prevent the
financial risks associated with a more global currency," said Sheng
Songcheng, head of the survey and statistics department at the
People's Bank of China, the country's central bank. "That calls for
carrying out various financial reforms in a coordinated way."
Inclusion would also put pressure on the central bank to offer
the same degree of clarity and transparency that the U.S. Federal
Reserve, the European Central Bank and other vital institutions
strive for. That could be difficult: In the past six months alone,
the PBOC shocked markets with a surprise currency devaluation,
stood mostly silent during a Chinese stock-market rout and confused
investors by issuing a new proclamation that turned out to be
months old.
"It needs to more clearly and effectively communicate with the
market," said Zhou Ping, founder of Bin Yuan Capital Ltd., an asset
manager in Shanghai. "It would be like a cultural change of sort
for the central bank."
One immediate challenge is how to deal with market pressure to
weaken the yuan due to China's slowing economic growth after three
months of trying to strengthen it. PBOC advisers say it will likely
allow a gradual and modest depreciation of the currency of between
3% and 5% in the next 12 months. The challenge, they say, is how to
clearly signal its intentions to the market.
The IMF is expected to approve inclusion when it meets on
Monday. IMF Managing Director Christine Lagarde and a fund staff
report have already endorsed the move.
The expected inclusion would mark a crowning achievement for
China's top central banker, Zhou Xiaochuan, and his lieutenants,
who have built political support around the idea that the yuan's
status in international finance should match China's heft as an
emerging world power. To meet IMF's reserve-currency criteria, the
central bank pushed through a slew of changes--such as freer
interest rates and easier access for foreign investors to China's
markets--despite opposition from some powerful interest groups.
But Mr. Zhou, 67, and any successor will have to press for more
changes in China's economy to turn the yuan into a global currency.
Already, China's leadership has slowed down a number of key
initiatives for financial reform amid worries about the slowing
economy. Notably, top leaders have set aside a goal of freer
financial markets by the end of this year and pushed the goal back
to the end of 2020.
The slowdown has also dimmed investor enthusiasm for the yuan.
Mr. Zhou of Bin Yuan Capital said the yuan is overvalued by about
20% and keeping it at the current level would only hurt the
economy. In a Nov. 19 report, Goldman Sachs Group Inc. listed a
"significant depreciation" of the yuan as the biggest risk facing
emerging-market assets next year. A drop could help China's export
sector but raise new criticism from the U.S. and elsewhere that
Beijing is playing politics with its currency.
While IMF inclusion is largely symbolic, it could open Beijing
to criticism of its financial policies when the fund conducts its
five-year review of the currencies in its basket. Formally,
inclusion would add the yuan to the IMF's special drawing rights,
or SDRs, a virtual currency IMF uses for emergency lending to its
members and countries can use to bolster their reserves.
"The actual inclusion of the yuan in the SDR is a nonevent for
most investors. The sound you'll hear is a collective yawn," said
David Loevinger, a managing director at fund manager TCW in Los
Angeles and a former U.S. Treasury official focusing on China. "The
lack of data and policy transparency remains a risk for
investors."
In the near term, inclusion would lead to a modest,
less-than-$30 billion in new foreign demand for yuan-denominated
assets, estimates Zhang Ming, a senior economist at the Chinese
Academy of Social Sciences.
"Domestically, it's far from certain whether the SDR status
could force other, structural overhauls," Mr. Zhang said.
Meanwhile, the PBOC must chart a path for the yuan to help the
economy while avoiding triggering a loss of faith from investors
world-wide.In August it devalued its main gauge for the yuan by 2%,
triggering an even sharper selloff in the yuan in financial markets
and raising concerns that more such moves might come.
Then it caused another round of confusion among investors
earlier this month by posting on its website market-opening remarks
made by Mr. Zhou in May as if they were new. The comments made
headlines and sparked rallies in markets in Hong Kong and the
Chinese city of Shenzhen before the central bank clarified that the
remarks were six months old.
The central bank has improved transparency, particularly through
increasing use of social media. Still, one problem is that it lacks
the kind of independence enjoyed by the Federal Reserve and others.
Most of the important policy decisions have to be signed off by the
Communist Party leadership first.
"The People's Bank of China has many audiences to serve," said
an adviser to the central bank.
Write to Lingling Wei at lingling.wei@wsj.com
(END) Dow Jones Newswires
November 28, 2015 23:15 ET (04:15 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.