Central bank says may increase holdings of Chinese yuan assets

The Philippine central bank on Wednesday said it may increase its holdings of Chinese yuan assets to diversify its sources of foreign exchange reserves after the International Monetary Fund (IMF) added the renminbi to its reserves basket.

Policymakers may also consider purchasing more yuan bonds, including those of longer tenors, as they become available, Bangko Sentral ng Pilipinas Governor Amando Tetangco told Reuters in a mobile phone message.

On Monday, the IMF admitted China's yuan, also called the renminbi, into its benchmark currency basket, in a victory for Beijing's campaign for recognition as a global economic power.

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IMF gives China's currency prized reserve asset status

WASHINGTON - The International Monetary Fund admitted China's yuan into its benchmark currency basket on Monday, in a victory for Beijing's campaign for recognition as a global economic power.

The decision to add the yuan, also known as the renminbi, to the Special Drawing Rights (SDR) basket alongside the dollar, euro, pound sterling and yen, is an important milestone in China's integration into global finances and a nod to the progress it has made with reforms.

To meet the IMF's criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours.

IMF chief Christine Lagarde, who along with in-house experts had previously given her support for the inclusion, made it clear she did not expect Beijing to stop there.

"The renminbi's inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented," she told reporters.

The People's Bank of China said the move, which was backed by countries including the United States, Britain and Japan, showed the international community expected China to play a bigger role in the world economy.

"Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance," it said in a statement.

The PBOC's vice governor Yi Gang said he expected the inclusion would make the yuan more stable and there was no basis for it to devalue further, as some traders had expected.

"LANDMARK RECOGNITION"

An IMF official said it was not IMF policy to disclose board voting records, but a person familiar with the IMF deliberations said approval had been unanimous.

The yuan will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR that also cut the euro's share by more than 6 percentage points.

An editorial in China's official Xinhua news agency said the decision was a "landmark recognition" of China's increased role in the global economy.

"The Chinese yuan clearly deserves a place in that grouping. China is the world's second-biggest economy and top trader, and its currency is liquid and stable enough to serve as a store of value," it added.

To be included in the SDR basket, the yuan had to meet the criteria to be "freely usable", or widely used to make international payments and widely traded in foreign exchange markets, a yardstick it missed at the last review in 2010.

The yuan's inclusion from October 2016 is largely symbolic, with few immediate implications for financial markets. But it is the first time an additional currency has been added to the SDR basket, which determines which currencies countries can receive as part of IMF loans.

"Ultimately China would like to see, as a number of countries would, the dollar end its reign as the global reserve currency," said Malcolm Polley, chief investment officer at Stewart Capital Advisors.

"That won't happen until there is another currency that from a geopolitical standpoint is as secure as the dollar."

EURO MAKES ROOM

The new SDR formula gives more weight to financial variables and less to exports, reflecting long-standing criticism of the methodology but also cutting the euro's share to 30.93 percent, from 37.4 percent.

The yuan will come in with a higher weight than sterling and yen, which will drop to 8.09 percent and 8.33 percent respectively, while the dollar remains broadly unchanged at 41.73 percent.

The addition is likely to fuel demand for China's currency and for renminbi-denominated assets as central banks and foreign fund managers adjust their portfolios to reflect the yuan's new status.

Moody's Investors Service said it would give a confidence boost for investors in yuan assets and it expected more yuan-denominated bonds from non-Chinese issuers in China, and an increase in Beijing's quotas for cross-border investment channels.

But analysts said investors would nevertheless remain cautious as long as China did not fully liberalize capital controls or allow the currency to float freely.

"'Freely usable' meant freely usable to reserve managers and available to official institutions," said Steven Englander, head of G10 foreign exchange strategy at Citi in New York.

"But if you look at the normal definition of liquidity, the point is not that just you and your mates can use it but that the whole world can use it."

The IMF said China's comparatively higher interest rates would likely increase the SDR interest rate, potentially pushing up the cost of IMF loans for some borrowers. (Reporting by Krista Hughes; Additional reporting by Jason Lange and Howard Schneider in Washington and Dion Rabouin, Daniel Bases and Sam Forgione in New York; Editing by Alan Crosby and Will Waterman)

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IMF poised to put Chinese yuan in elite currency basket

WASHINGTON - The International Monetary Fund is expected to approve inclusion of China's yuan in its SDR basket of elite currencies on Monday, rewarding Beijing's strong pursuit of the global status.

The IMF executive board is scheduled to meet Monday to decide on the recommendation by staff experts earlier in November to include the yuan, also known as the renminbi, alongside the US dollar, euro, Japanese yen and British pound in the grouping.

While not a freely traded currency, the SDR (special drawing right) is important as an international reserve asset, and because the IMF issues its crisis loans -- crucial to struggling economies like Greece -- valued in SDRs.

China, now the world's second-largest economy, asked last year for the yuan to be added to the grouping of world reserve currencies, but until recently it was considered too tightly controlled to qualify.

It is extremely rare that the executive board, which represents the IMF's 188 member nations, opposes the recommendation of its own experts. IMF Managing Director Christine Lagarde said in mid-November that she supported the experts' finding that the yuan had met the requirements to be a 'freely usable' currency" -- a key hurdle for SDR status.

If accepted, the decision would not take effect before September 30, 2016, to allow users more time to prepare. The last time the SDR basket was modified was in 2000, when the euro replaced the German deutschemark and the French franc.

The remaining question is the yuan's weight in the basket. It could be 10 percent to 16 percent, but the lower estimate is more likely due to the Chinese currency's limited convertibility.

The basket composition is reviewed every five years. At the last rebalancing in 2010, the dollar accounted for 41.9 percent, the euro 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.

That weighting revision was based on the value of the exports of goods and services by country or currency zone, and the amount of reserves denominated in the respective currencies held by other IMF members.

DIPLOMATIC SUCCESS

The entry of the yuan is, above all, a major diplomatic success for Beijing, which will see its money graduate to the inner circle of the world's most important currencies.

The vote of the United States, the largest IMF stakeholder, will be closely watched, as will US political reactions. US officials have long accused China of keeping the yuan artificially low to gain a trade advantage, making its exports relatively cheaper.

The US Treasury Department, in an October 19 report, said that the yuan "remains below its appropriate medium-term valuation."

Paradoxically, China's unexpected devaluation of the yuan last August received good marks from the IMF because it reinforced the currency's movements with market forces and opened the door to future revaluation.

Beijing on Wednesday announced an initial group of foreign central banks has been allowed to enter the Chinese currency market, which likely will promote further internationalization of the yuan in global trading.

Credit rating firm Fitch says it does not expect the yuan's inclusion in the IMF basket "to lead to a material shift in demand for renminbi assets globally in the short term." However, it said, over time the emergence of the yuan as a global reserve currency could support China's credit rating.

An IMF decision to include the yuan among its elite currencies risks angering some lawmakers in the US Congress amid fierce maneuvering for the 2016 presidential election.

Congress, for example, has repeatedly refused to ratify a 2010 IMF reform that would give greater weight to the emerging-market powers, the so-called BRICS - Brazil, Russia, India, China and South Africa.

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