Yuan gets early warning on IMF ambition as MSCI defers on stocks

[HONG KONG] China's efforts to obtain reserve status for the yuan received an early warning, with a compiler of equity indexes saying the nation needs more policy changes before its shares can be added to an emerging-market benchmark.

New York-based MSCI Inc deferred a decision on including yuan-denominated stocks, citing investor concerns such as accessibility and capital mobility. Chinese officials have called for the International Monetary Fund to include the yuan in its basket of reserve currencies in a review in October.

"The MSCI deferral is definitely a push for China to accelerate capital-market reforms," said Banny Lam, co-head of research at Agricultural Bank of China International Securities Co in Hong Kong. "Restrictions on fund flows must be eased."

The onshore yuan was little changed at 6.2063 a dollar as of 10:16 am in Shanghai, China Foreign Exchange Trade System prices show. Its gap with the central bank reference rate of 6.1173 was 1.5 per cent, within the 2 per cent daily limit. In offshore trading in Hong Kong, which is free from the mainland's capital controls, the currency rose 0.03 per cent to 6.2112.

China is making the yuan more freely usable in order for it to be included in the IMF's Special Drawing Rights basket of reserve currencies, PBOC Governor Zhou Xiaochuan said in April. Changes in the past month include opening a market for short- term loans to foreign banks and allowing cross-border sales of funds.

The IMF's mission to China said in preliminary findings released on May 26 that the yuan is no longer undervalued, and that it will work with Chinese authorities toward its inclusion in the SDR. The currency failed to qualify at the last five- yearly review in 2010 as it wasn't seen to be "freely usable."

"China will have to do more on capital-account opening in order to win the yuan a chance for SDR," said Li Miaoxian, a Beijing-based analyst at BOCOM International Holdings Co.

"It has to allow freer capital flows in and out of the country. The exchange rate must be more flexible and foreign central banks should be given wider access to the domestic bond market."

BLOOMBERG