China's new currency status points to weaker yuan
THE newly global yuan could get weaker. The International Monetary Fund (IMF) has endorsed China's financial reforms by adding the renminbi to its basket of reserve currencies. The largely symbolic boost will do little to counteract the pressure from a slowing economy, lower interest rates and capital outflows.
The long campaign to add its currency to the IMF's Special Drawing Rights has forced the People's Republic into some uncomfortable contortions. On the one hand, officials have loosened some controls on capital flows and allowed the yuan's value to fluctuate more widely in an effort to satisfy demands that a reserve currency be "freely usable". Yet, after a botched mini-devaluation in August spooked global investors, Chinese leaders have also insisted that the yuan will remain broadly stable.
The central bank has reconciled these objectives by propping up the currency in both onshore and offshore markets. Though the intervention has restored calm, it is not sustainable, even with foreign-currency reserves of US$2.5 trillion.
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