Jing Yang

Portfolio | Fresh bout of depreciation awaits yuan after IMF review

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Yuan is fundamentally overvalued and downward pressure would kick in soon as Beijing stops intervention upon IMF’s nod

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New 100 renmimbi notes are held up at a bank in the central business district of Hong Kong. Photo: Reuters

Jing Yang

Published: 12:00pm, 18 Nov 2015Updated: 12:37pm, 18 Nov 2015

A fresh bout of depreciation is in store for China’s yuan after the International Monetary Fund unveils a key decision at the end of this month over the currency’s pursuit of an elite currency club membership, analysts say.

The IMF is expected to decide on November 30 whether to include the yuan in the Special Drawing Rights, a supplementary reserve asset and a quasi-currency rarely used in financial transactions.

Expectations have risen to an all-time high that an inclusion –which would give the currency a symbolic boost of confidence- is of little doubt, after an IMF staff paper issued last Friday commending the yuan having met the criteria of being “freely usable” and was ripe to be incorporated into the SDR basket.

Unfortunately though, the yuan’s crowning coincides with the beginning of a new era of a stronger US dollar, as the Federal Reserve is widely expected to raise interest rates next month for the first time in almost a decade.

“As such, the CNY is likely to remain on the defensive against the USD, ahead of the Fed rate hike and amid global growth fears,” said Koon How Heng, senior currency strategist at Credit Suisse.

Heng expects the CNY to stabilise at around 6.40 against the USD in the near term, and weaken towards 6.60 in the next six to 12 months.

An SDR inclusion would not likely trigger an immediate desire among global reserve managers and private investors to hold yuan-denominated assets, a process that needs more capital account liberalisation in China.