China's yuan slightly weaker, SDR inclusion in focus

[SHANGHAI] China's yuan weakened slightly on Friday, but held around 6.67 per US dollar as the market adopted a wait-and-see attitude ahead of the yuan's inclusion into a key global currency basket.

The Chinese currency will be officially included into the International Monetary Fund's reserves basket, known as Special Drawing Rights (SDR), on Oct 1.

The market, however, was mixed about the impact on the yuan.

The inclusion will increase global demand for the yuan as foreign institutions, particularly official organisations, will build up fresh positions in the Chinese currency, with some estimating up to nearly US$1 trillion in the next five years. That will help boost the yuan's value.

However, inclusion in the SDR basket requires Beijing to gradually loosen its grip on the tightly-controlled exchange rate regime and may add depreciation pressure on the yuan in the foreseeable future, traders said.

The yuan is already under downward pressure due to a strengthening US dollar and China's weak economic growth. It is widely believed that, without official intervention, the yuan would be much weaker.

"The market is uncertain how the yuan will perform right ahead of and right after the SDR inclusion," said a trader at a Chinese commercial bank in Shanghai. "So investors take a defensive attitude."

Spot yuan opened at 6.6699 per US dollar and was changing hands at 6.6701 at midday, 35 pips weaker than the previous close.

The People's Bank of China set the midpoint rate at 6.6670 per US dollar prior to market open, softer than the previous fix 6.6513. If the yuan closes at the midday level, it will be almost unchanged for the week.

Despite the mixed sentiment, most traders agreed that the yuan would largely remain stable around the time of its inclusion into the SDR basket.

"Demand for the yuan because of the inclusion will increase over time, with only a gradual impact," said a trader at a European bank in Shanghai.

"Besides, the IMF reviews the openness of an SDR country's currency mechanisms only once in five years. That leaves China enough time to gradually reform its exchange rate regime, while continuing to intervene in trading to help stabilise the yuan in case of steep volatility in the short term."

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.7, firmer than the previous day's 94.54.

Offshore yuan was trading 0.10 per cent weaker than its onshore counterpart at 6.6768 per US dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.8545, -2.74 per cent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

REUTERS