World Economy

Yuan in SDR to Have Far-Reaching Effects

Yuan in SDR to Have Far-Reaching EffectsYuan in SDR to Have Far-Reaching Effects

Getting the yuan into the International Monetary Fund’s special drawing rights basket of currencies, as the fifth reserve currency, may have been the easy part.

International Center for Trade and Sustainable Development reports that the “Renminbi (is)growing in stature despite residual concerns”, the Financial Times reported on Nov. 30. The “IMF’s yuan inclusion signals less risk taking in China”, Reuters said on Nov. 29. “China’s renminbi is approved by the IMF as a main world currency”, New York Times, reported on Nov. 30. “China says no basis for the yuan to continue to devalue–PBOC”, Reuters said  Dec. 1.

With the US Federal Reserve set to raise interest rates and probably rock the global financial market at a time when China is loosening its monetary policy to arrest its economic slowdown, the renminbi will likely come under greater downward pressure, NewsNow reported.

It also explained that yuan-based capital transactions will become more and more frequent as an increasing number of Korean financial companies are doing business in China with new investment products.

The renminbi joining the US dollar, the euro, the pound and the yen in the SDR basket is significant as it will have real and far-reaching effects.

The basket determines the currency mix that countries receive when the International Monetary Fund disburses financial aid. The IMF had confirmed that decision this past August, on the grounds that doing so would ensure the smooth operation of the system, including if another currency was added. The dollar now accounts for 41.9% of the basket, while the euro accounts for 37.4%, the pound 11.3% and the yen 9.4%.

IMF Managing Director Christine Lagarde said the inclusion was “clearly an important milestone in a journey that had begun months, if not years ago” to a “market-driven” economy in China. Since China continues to meet the export criterion, a key focus of this paper is on assessing whether the renminbi could be determined to be a freely usable currency, which is the second criterion.

As the world’s largest trading nation with the largest foreign exchange reserves, it is more than obvious that China’s deeper integration into the world economy will naturally give rise to more worldwide use of its currency in trade and overseas investment.

Wang Tao, chief China economist at UBS AG, said the SDR inclusion will accelerate renminbi internationalization, and is also a milestone in the integration of the Chinese economy into the global financial system. The currency failed to make the cut at the last review in 2010.

Analysts believe the International Monetary Fund decision’s impact on foreign exchange markets will be muted, though it will encourage central banks to speed up diversification of their currency reserves by buying yuan.

The IMF will add the Chinese currency to its SDR basket from October 1, 2016 with a weighting of 10.92%, as the currency has “met all existing criteria”.