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 By acknowledging the yuan as a major global currency alongside the
dollar, euro, yen, and pound, as is widely expected, IMF members
will endorse the efforts of China's economic reformers and by doing
so hope that will spur fresh change in China.
But Chinese policy insiders and international policymakers say
reforms may not continue at the breakneck pace of recent months. In
addition, Chinese sources suggest adding the yuan to the IMF basket
leaves economic conservatives better positioned to resist further
significant reform in a reminder of the period following China's
entry to the World Trade Organization (WTO).
A slowing in the pace has implications for those who bet that making
the yuan a global reserve currency will give it a boost. The yuan
has fallen almost 3 percent against the dollar this year, on course
for its biggest annual fall since its landmark 2005 revaluation.
The IMF decision will remove a key incentive – bolstering national
pride – that reformers used to push otherwise reluctant
conservatives to support reforms.
More importantly, however, are worries in Beijing that the rickety
economy can't handle more aggressive reform that allows a freer flow
of currency across China's borders.
Beijing is already rapidly losing a taste for more experimentation
with capital flows, say the sources - economists involved in policy
discussions who declined to be identified because of the sensitivity
of the subject.
After the stock market buckled more than 40 percent in the summer –
which many blamed on nefarious foreign capital – regulators have
made it harder for money to leave China to counter yuan selling
pressure and have intervened heavily in onshore and offshore
currency markets. Not just conservatives, but more liberal
economists are calling for a pause.
"Our ability to control financial risk has yet to be improved," said
a senior economist at the China Centre for International Economic
Exchanges (CCIEE), an influential Beijing think-tank.
"Any rush to open up the capital account completely could be
unfavorable for controlling financial risks ... we will definitely
be very cautious."
The IMF's executive board, representing the Fund's 188 members, is
likely to approve inclusion of the yuan in the reserve basket, known
as Special Drawing Rights (SDR). An IMF staff report and Managing
Director Christine Lagarde have endorsed the idea. The United States
has suggested it will not stand in the way.
The SDR basket determines the currency mix countries like Greece
receive when the IMF disburses financial aid. Some economists
predict inclusion will boost demand for the yuan, or renminbi (RMB),
by more than $600 billion.
Chinese media predicted entry will draw over 1 trillion yuan ($156
billion) of foreign money into China bonds. Both predictions rest on
assumptions more capital account opening is on the way.
"The RMB (will be) included so the reform-oriented forces can keep
the upper hand; there's no way back now for the conservative members
in the party," said an IMF policymaker from an advanced economy, who
spoke on condition of anonymity.
Seeing the SDR decision as the goal of China's reforms is "as if the
tail were wagging the dog," said Otaviano Canuto, who represents
Brazil and other Latin American and Caribbean countries on the IMF
board.
"The expectation is that the eventual inclusion of the RMB is a
moment in the process ... (which) is being undertaken and
implemented for itself, because it's part of the development of the
Chinese economy," he said.
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"WHY WOULD YOU TAKE MORE RISKS?"
China has pushed to make the yuan more international, setting up
swap arrangements with countries so trade can be settled in the
currency and China has said it will push ahead with financial
reform. It has widened the yuan's trading band and this year went a
long way to freeing up interest rates.
But Chinese policy advisers have always been divided, sometimes
publicly, on how far China should go in opening up its borders to
foreign capital; while few use vocabulary that rejects general
reform principles, many domestic policy advisors - including some
otherwise supportive of economic liberalization - warn throwing open
the gates to cross-border flows would be destabilizing.
They have many quiet allies among China's state-owned banks and
other inefficient industries, which fear that a freer market for
capital will expose them to international competition and put them
out of business.
Foreign access to financial markets is still tightly restricted and
of late regulators have reversed some measures that were designed to
make it easier to move the yuan offshore.
"The (Chinese) reform camp has been selling (IMF inclusion) partly
on the basis of international prestige, in particular equaling
Japan," said Derek Scissors, chief economist at China Beige Book.
"What is the reform movement going to say now to move reform forward
... if the IMF has already recognized China as an internationalized
currency?" asked Scissors. "Why would you take more risks?"
Some see parallels with China's WTO entry in 2001, in which Chinese
reformers used entry negotiations as an incentive to push through
painful state sector restructuring, only to see their agenda
sidelined shortly after inclusion.
China's retreat from its WTO commitments was widely blamed on the
retirement in 2003 of reform-minded Premier Zhu Rongji. Current
leading reformer Zhou Xiaochuan, the head of the central bank who
has said the yuan will be basically convertible by this year, is at
67 years old already past the typical retirement age for senior
Communist Party officials.
"Previous wording was 'accelerating' convertibility, now it's
'making RMB convertible in an orderly manner,'" said an economist,
of the China Academy of Social Sciences (CASS), who is also close to
policy discussions. He said China was well aware capital account
liberalization elsewhere - in particular Japan - has been blamed for
causing "serious crises."
"The most important thing is to handle domestic issues well; we
cannot afford to see another collapse of the stock market."
(Additional reporting by Kevin Yao in HONG KONG; Editing by Neil
Fullick)
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