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Yuan fails haven test ahead of reserve basket move

NEW YORK — Just two months before it is to be included in the International Monetary Fund’s influential basket of global reserve currencies, a new report distributed by the Federal Reserve is casting doubt on the ability of China’s yuan to achieve haven status for investors.

NEW YORK — Just two months before it is to be included in the International Monetary Fund’s influential basket of global reserve currencies, a new report distributed by the Federal Reserve is casting doubt on the ability of China’s yuan to achieve haven status for investors.

While the yuan performed better than some of its major peers from 2011 through late 2015, its relative value has fallen since then against the traditional haven currencies as market volatility increased, according to a study published last week. The report tested the relationship between a gauge of stock-market price swings and the value of the yuan against the United States dollar, yen, euro, the British pound and the Swiss franc, currencies perceived as safe exchange rates because their relative value rises during uncertainty.

“Overall our findings do not support the suggestion that the renminbi is currently a safe haven currency and in that sense question the notion that the renminbi is progressing towards safe haven currency status,” Messrs Rasmus Fatum and Guozhong Zhu of the University of Alberta and Hitotsubashi University’s Yohei Yamamoto wrote in the report published by the Federal Reserve Bank of Dallas.

President Xi Jinping’s efforts to promote the yuan’s international usage culminated last year when the International Monetary Fund added it to its benchmark basket of reserve currencies, making it part of the Special Drawing Rights, or SDR, effective Oct 1. Yet, the yuan has declined 2.8 per cent this year, taking a toll on the currency’s global appeal amid concern about the strength of economic growth and uncertainty about the People’s Bank of China’s commitment to letting the currency trade more freely.

The PBOC did not respond to a request for comment on the report.

Transparent government institutions, predictable policies and liquid markets help make a country’s currency a haven destination for investors during times of market turbulence, all areas where China has sometimes struggled.

“Just because you’re a reserve currency doesn’t mean you have the status of a safe haven,” said Mr Win Thin, Brown Brothers Harriman’s head of emerging-market currency strategy in New York. “There is not enough confidence in China, its institutions don’t have a reliable track record and even though the IMF recognised that China is a growing player in the world economy, the yuan has a long way to go before it can be viewed as safe.”

POLICY MISSTEPS

A surprise devaluation of the yuan a year ago combined with more unexpected intervention in January followed by restrictions on the flow of money across the country’s borders have stoked concern about the leadership’s commitment to a more free exchange rate. Such missteps have detracted from reforms including the opening of onshore markets and improved data disclosure designed to place the yuan on a par with the dollar, euro, yen and British pound.

Making the yuan an international currency is not only about Chinese global political ambitions. The country is opening its capital markets to foreign investors to try and draw money as the slowest economic growth in a quarter century drives funds abroad. That, in turn, has put downward pressure on the yuan, prompting the PBOC to step up intervention.

China’s central bank kept the yuan from slipping past 6.7 per dollar last week by strengthening its reference rate, which limits onshore moves to 2 per cent on either side, even as the greenback advanced.

This spurred speculation it is not sticking to its stated policy of following the direction of the market. BLOOMBERG

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