The yuan still has some way to go before it can become a major reserve currency, former Federal Reserve Chairman Ben S. Bernanke said Tuesday in Taipei. The IMF requires that a currency is “freely usable” to be included in its SDR basket.

Endorsement by the Washington-based lender would lead to about $1 trillion being switched into Chinese assets over the next five years, according to an estimate this month from Standard Chartered Plc. AXA Investment Managers estimated some 10 percent of the $11.6 trillion of global reserves would flow into yuan assets, though it didn’t give a timeframe.

China should allow greater flexibility in its exchange rate, with intervention limited to avoiding disorderly market conditions or excessive volatility, said the IMF’s China mission, which is led by the lender’s deputy director of Asia and Pacific Markus Rodlauer. The statement said it contains the views of the IMF staff involved and has not yet been endorsed by the institution’s board.

The yuan rose 0.6 percent versus the dollar in the past 12 months, while Brazil’s currency dropped 28 percent and Russia’s slid 32 percent. China’s productivity will probably rise more rapidly than the rest of world so its exchange rate will need to appreciate to take account of that, David Lipton, the IMF’s No.2 official, said at a briefing Tuesday in Beijing.

Eoin Treacy's view

By remaining relatively steady against the Dollar over the last year, the Renminbi has appreciated against a wide basket of other currencies not least the Euro, Yen and Korean Won which account for more of its trade than the US Dollar. The currency has unwound almost the entire 1993 devaluation suggesting that the CNY6 level relative to the US Dollar is probably about as strong as the Chinese want to see the currency. 

The Chinese stock market continues to respond to the easing bias announced in response to the slowing property market. The CSI 300 broke out of its most recent short-term range last week and extended the advance both yesterday and today. A sustained move below 4700 would now be required to signal mean reversion is underway.