IMF bas­ket risks ‘will be dealt with’

China Daily (Canada) - - FRONT PAGE - By CHEN JIA in Beijing chen­jia1@chi­

We are able to keep the ren­minbi’s ex­change rate stable at a rea­son­able level.”

China is ready to cope with pos­si­ble risks aris­ing from the ren­minbi be­ing in­cluded in the IMF’s re­serve cur­ren­cies bas­ket, a se­nior of­fi­cial said on Tues­day.

The global fi­nan­cial body de­cided on Mon­day to in­clude the Chi­nese cur­rency in the bas­ket.

The de­ci­sion will give the ren­minbi the third-high­est weight­ing, or 10.92 per­cent, af­ter the US dol­lar and the euro in the spe­cial draw­ing rights bas­ket. It was taken af­ter the In­ter­na­tional Mon­e­tary Fund rec­og­nized the ren­minbi as be­ing “freely us­able”.

Volatile cross-border cap­i­tal flows and more fluc­tu­a­tions in ex­change rates are likely fol­low­ing the move, which will also lead to a fur­ther open­ing of the Chi­nese fi­nan­cial mar­ket, ac­cord­ing to econ­o­mists.

“We are ready for the in­clu­sion,” said Yi Gang, deputy gov­er­nor of the Peo­ple’s Bank of China, the cen­tral bank, at a news brief­ing.

China will con­tinue its for­eign ex­change re­form aimed at build­ing a mar­ket-ori­ented regime with­out gov­ern­ment in­ter­ven­tion, or a “clean float”, but it needs a tran­si­tional pe­riod, he said.

“We are able to keep the ren­minbi’s ex­change rate stable at a rea­son­able level,” said Yi, who also pledged to pre­vent un­ex­pected cap­i­tal flight that may cause a sys­temic fi­nan­cial cri­sis.

The IMF said on Mon­day that the ren­minbi met all cri­te­ria for it to be in­cluded in the SDR bas­ket.

The de­ci­sion will take ef­fect on Oct 1 next year to en­able the con­tin­ued smooth func­tion­ing of SDR-re­lated oper­a­tions and to al­low suf­fi­cient lead time for ad­just­ments, ac­cord­ing to the IMF.

Af­ter the move, the US dol­lar’s weight­ing in the bas­ket will be re­duced to 41.73 per­cent from 41.90 per­cent, the euro’s to 30.93 per­cent from 37.40 per­cent, the Ja­panese yen to 8.33 per­cent from 9.4 per­cent and the Bri­tish pound to 8.09 per­cent from 11.3 per­cent.

The com­po­si­tion of the bas­ket is typ­i­cally re­viewed ev­ery five years by the IMF’s Ex­ec­u­tive Board to en­sure that the bas­ket re­flects the rel­a­tive im­por­tance of cur­ren­cies in the global trad­ing and fi­nan­cial sys­tems.

Wang Tao, chief China econ­o­mist at UBS AG, said the SDR in­clu­sion will ac­cel­er­ate ren­minbi in­ter­na­tion­al­iza­tion, and is also a mile­stone in the in­te­gra­tion of the Chi­nese econ­omy into the global fi­nan­cial sys­tem.

“For­eign cen­tral banks and sov­er­eign wealth funds are ex­pected to in­crease in­vest­ment in ren­minbi as­sets when it be­comes one of the global re­serve cur­ren­cies, which re­quires more re­form mea­sures to pre­vent po­ten­tial risks,” she said.

This year, China’s cen­tral bank has taken a se­ries of re­form mea­sures.

Th­ese in­clude the adop­tion of a mar­ket-ori­ented daily ex­change rate-fix­ing regime; al­low­ing for­eign cen­tral banks and in­ter­na­tional fi­nan­cial or­ga­ni­za­tions to ac­cess the on­shore bond and for­eign ex­change mar­kets; and set­ting freer in­ter­est rates.

IMF Man­ag­ing Di­rec­tor Christine Lagarde said on Mon­day in Wash­ing­ton, “The ren­minbi’s in­clu­sion in the SDR is a clear in­di­ca­tion of the re­forms that have been im­ple­mented and will con­tinue to be im­ple­mented, and is a clear, stronger rep­re­sen­ta­tion of the global econ­omy.”

A re­search note from JPMor­gan Chase and Co forecast that by the end of this year the ren­minbi’s value may drop slightly to about 6.4 against the US dol­lar, with a pos­si­ble rate in­crease by the US Fed­eral Re­serve and fur­ther mon­e­tary eas­ing by the Euro­pean Cen­tral Bank in De­cem­ber.

The SDR sys­tem was cre­ated by the IMF in 1969 to sup­ple­ment itsmem­ber­coun­tries’ of­fi­cial re­serves.

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