China to open onshore currency market to foreign central banks: Premier Li

China's Premier Li Keqiang speaking at opening of the World Economic Forum in Dalian on Sept 10.
China's Premier Li Keqiang speaking at opening of the World Economic Forum in Dalian on Sept 10. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China will open its domestic foreign-exchange market to overseas central banks, making it easier for other nations to hold yuan assets as Asia's biggest economy pushes for the currency to win reserve status at the International Monetary Fund.

The country will keep the yuan stable at a reasonable, equilibrium level, Premier Li Keqiang said while announcing the easing of controls during a speech at a World Economic Forum meeting on Thursday (Sept 10). The nation doesn't want a currency war, he said, after the People's Bank of China shook up global markets with a devaluation on Aug 11. Overseas monetary authorities have already been granted access to China's interbank bond market.

"The participation of foreign central banks will make the onshore yuan's exchange rate more globally recognized," said Banny Lam, co-head of research at Agricultural Bank of China International Securities in Hong Kong. "Allowing direct access gives the central banks more flexibility and control over costs, compared with going through local banks for trades. In general, it's a positive move for yuan internationalization."

The decision will help further China's push for the yuan to join the dollar, euro, yen and pound in the IMF's Special Drawing Rights basket of reserve currencies. A key indicator used to determine qualification is a currency's share of official reserves and the yuan ranked seventh last year, behind the four SDR members as well as the Australian and Canadian dollars, according to the IMF. The Chinese currency's share was 1.1 per cent, compared with 63.7 per cent for the US dollar.

More than 60 global central banks and sovereign wealth funds have invested in yuan-denominated assets, with combined holdings of around US$70 billion to US$120 billion, Standard Chartered estimated in a report published in May.

"Not long ago, we allowed foreign central banks to participate in the interbank bond market," Li said at the WEF meeting in Dalian, China. "The next step is to allow foreign central banks to directly participate in the interbank foreign-exchange market. Before the end of this year, we will complete the cross-border yuan payment system that facilitates the development of the offshore yuan market."

The first phase of the China International Payment System will begin in Shanghai to handle deals in Asia, Oceania and Europe, the PBOC said in a statement on June 11. The CIPS will facilitate cross-border trade settlement, direct investments and other yuan deals, it said.

The yuan slid 2.6 per cent in August, the most in two decades, as the central bank devalued the currency and said it was adopting a more market-based methodology to determine a daily reference rate. The currency was trading 0.11 per cent lower at 6.3850 per US dollar as of 12:47 pm in Shanghai, little changed from before Li's speech. The offshore yuan traded in Hong Kong fell 0.03 per cent to 6.4688, a 1.3 per cent discount to the onshore rate.

"Thursday's move won't result in significant inflows in the short-run as foreign central banks probably won't be interested in making large investments as depreciation expectations are still strong and volatility remains high," said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

"This is a step toward internationalization of the yuan. The gap between onshore and offshore yuan will narrow only when China's economic fundamentals get better."