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Singapore shares close higher in line with Hong Kong, China on yuan news

CONCERNS over whether the yuan's inclusion as a reserve currency would spark volatility in equity markets proved unfounded as stocks on Tuesday rose sharply after confirmation that China's currency has indeed been added to the International Monetary Fund's (IMF's) Special Drawing Rights (SDR) basket.

With Hong Kong's Hang Seng Index jumping 1.8 per cent and stocks in China also firming, the Straits Times Index finished 14.32 points higher at 2,870.26. Turnover amounted to 994 million units worth S$1.02 billion versus S$1.7 billion on Monday, and excluding warrants there were 219 rises versus 150 falls.

There had been worries last week that the yuan being included in the IMF's SDR basket would spark a second round of devaluation for the currency following the first in August. However, Morgan Stanley (MS) in its Dec 1 Economic and Strategy Insights said that the announcement of the inclusion of the yuan in the SDR basket is a positive event.

"The key medium-term benefit is that China will be able to issue liabilities in its own currency, thereby helping to mitigate funding risks. Moreover, the benefits of further financial reform and improvement of capital allocation will also be clear positives" said MS.

ABN Amro said that the IMF's decision had been widely expected and that over the coming year, ABN expects the Chinese authorities to maintain their current policy of allowing a gradual currency depreciation to support exports and re-inflate the economy.

"We also expect the PBOC (People's Bank of China) to reduce volatility in the yuan and narrow large discrepancies between the onshore and offshore yuan", said the bank.