Will China's capital ouflows pour in Australia IM move rattles...

Will China's capital ouflows pour in Australia
IM move rattles yuan anew

• DOW JONES NEWSWIRES
• 4 HOURS AGO

• ECONOMY
  
• CHINA
  
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• CURRENCY

China’s yuan fell after the International Monetary Fund dealt a setback to the currency's role on the global stage, breaking a streak of stability earlier this week.

On Thursday, the central bank, defying market sentiment, set the daily reference rate, or fix, sharply stronger than in previous days at 6.3915 per US dollar. That's 0.08 per cent stronger than the level set a day earlier.

In early trade the currency fell as much 0.11 per cent and stabilised later in the day.

The International Monetary Fund late on Wednesday signalled that China’s currency won't be added to its influential basket of reserve currencies for at least a year, after the executive board approved an extension for the current basket of currencies that includes the US dollar, Japanese yen, pound and euro. The decision confirms an earlier proposal to delay the five-year reshuffling of the basket, which doesn't include the yuan.

For months, investors and analysts were betting on a stable yuan as China lobbied the International Monetary Fund for inclusion in the emergency lender's elite basket of currencies, known as the Special Drawing Rights. Recognition as a reserve currency would be a symbolic win for China’s currency and policy makers on the global stage.

For the past week, the yuan, also called the renminbi, has traded in a tight range after China’s central bank abruptly devalued its currency by almost 2 per cent in one day. On each day this week, the central bank set the yuan's daily reference rate marginally stronger than in previous days.

Now, the IMF's latest move adds to investors' worries about Chinese policy makers' actions to rein in its unpredictable stock market and inconsistently manage its currency policy.

"It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policy makers, and by extension the near-term direction of the [yuan]," analysts from Goldman Sachs wrote in a note earlier this week.

Most analysts have downgraded their forecasts for the yuan against the US dollar as expectations rise that the Chinese currency will depreciate. Goldman Sachs said the yuan will hit 6.60 per dollar over the next 12 months while analysts at ANZ Bank lowered its forecast for the yuan to 6.55 against the US dollar by the end of the year.

The move to depreciate the currency followed closely on the heels of equity market volatility and officials' subsequent intervention. It means that "investing in renminbi assets has gone through a step change of extra risk -- its riskier now to invest in renminbi assets than it was before the summer," said Geoff Lunt, product specialist on Asian fixed income at HSBC Global Asset Management in Hong Kong. Mr Lunt, however, said this also has presented opportunities in offshore yuan bonds.

The yuan last traded at 6.3902 against the US dollar.