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A Chinese win at IMF no one-way bet for yuan

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Later this year the IMF might include the Chinese yuan in its official basket of reserve currencies, a political and economic triumph for Beijing in the teeth of U.S. opposition, but slowing growth in China is likely to limit the impact of the victory.

Adding the yuan, or renminbi, to the dollar, euro, yen and pound in the Special Drawing Rights (SDR) basket, as IMF head Christine Lagarde says is only a matter of time, should over time expand its role as a currency for international trade and investment and make the world's central banks more likely to hold it in reserve.

That in turn should lower transaction costs, exchange risk and borrowing costs for China, already the world's largest trading nation, and its companies.

Fresh from its success in drawing member countries to a new China-led development bank in the teeth of U.S. opposition, Beijing would also enjoy another victory over Washington, which opposes early inclusion of the yuan in the SDR and sees China as a nascent rival for influence over global financial architecture.

But rather than enjoying a rally in the yuan after months of softness, as some analysts have speculated, markets might find little has changed.

That is in part because the yuan is unlikely to receive an allocation in the SDR of more than the 10 percent individual share that the British pound and Japanese yen each have, perhaps amounting to just $31 billion, says Chi Lo, economist at BNP Paribas in a research note.

It is also because Beijing, though it is under pressure to widen the yuan's trading band and ease restrictions on cross-border capital flows to meet IMF tests for accessibility that it flunked last time it was under consideration, is unlikely to go too fast down the path of reform.

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"A promotion of capital account reforms could mean capital outflows. I believe China will at least wait until its economic growth stabilizes," said Liu Dongliang, senior currency strategist at China Merchants Bank in Shanghai.

Yu Yongding, an influential economist at the Chinese Academy of Social Sciences, a top government think-tank, has argued in state media that the timetable for convertibility should be pushed back while China's economy is under downward pressure and the U.S. Federal Reserve tightens monetary policy.

Holding risk

With Chinese growth at its slowest in two decades, international use of the currency has already slackened this year.

A recent survey by HSBC showed usage of the yuan in the United States, UK, France and Germany has weakened sharply in 2015, while usage in Asia stayed largely flat.

Even Hong Kong, where most of the international investment and trade in yuan takes place, saw a slight retreat.

Corporate treasurers who spoke to Reuters said the SDR move would be unlikely to encourage them to carry more yuan.

Most were concerned with the risk involved in holding a currency that fell heavily against the dollar in 2014 and looks set to fall again this year, squeezed by U.S. monetary policy and domestic easing to arrest slowing growth.

"We don't plan to have an offshore pool of renminbi. Especially with the depreciation last year, we aren't sure about using it as a global currency," said a treasurer at a major U.S. multinational in Shanghai.

Given the risk that a softer yuan would only further discourage treasurers' enthusiasm for dealing in the currency, and the risk of capital flight if the slide accelerates, domestic currency traders say the People's Bank of China (PBOC) has even stepped up its intervention in the market to try and prop the currency up.