The inclusion of the yuan in the SDR basket is a step in the right direction, but much more needs to be done to make it a pillar of this multicurrency system. The stock market crash in China raised some important questions, eventually leading to a surprise devaluation of its domestic currency, the Yuan. As the Korea Times newspaper noted of the International Monetary Fund decision, “The yuan’s status upgrade signifies that the world’s most populous country is ready to challenge the U.S.in the economic field as well as in military terms and diplomacy”. There are simply too many uncertainties even after significant Chinese financial reforms.
Advertisement
“Yuan is now the world’s third largest currency and it will give confidence to Malaysian businesses to use yuan instead of other currencies in trade settlement”.
“Our development will not depend on mega deals from China but on ourselves”.
“While joining SDR may not bring immediate material benefit to China, the significance has and will continue to lie in all the necessary financial reforms and capital account opening to achieve the positive outcome and further advancing RMB internationalisation”, UBS said.
China is the world’s second largest economy and contributes 16.86% to world GDP (at PPP).
Consequently, with the weakening Chinese yuan outlook, US investors seeking China equity exposure may be exposed to currency risks – a weaker currency means that returns are lowered when converted back into Dollars.
IMF adds Chinese Yuan as the reserve currency – With the International Monetary Fund (IMF) including the Chinese Yuan in its Special Drawing Rights (SDR), the central banks will be able to buy more of the currency.
In contrast, state-owned enterprises witnessed a sharp foreign trade fall of 12.9 percent year on year to 3.65 trillion yuan, accounting for 16.5 percent of the country’s total during the period. Like any other emerging market currencies, the Pula has weakened against the developed market currencies, notably the dollar.
The currency-hedged China A-shares ETFs have been slightly outpacing the non-hedged versions as the Chinese currency depreciated against the Dollars.
Despite the increased role for the yuan, the USA dollar still dominates in finance and trade, and is “the world’s pre-eminent reserve currency”, wrote the Wall Street Journal.
The transition may be tough but in the long run China may emerge as a very influential economy. One suspects that flood of reports downplaying the potential effects of the yuan’s SDR inclusion are in effect an attempt by the U.S.to downplay the potential significance and its possible effects on the US economy.
The IMF’s directors pointed to the “substantial increase in the worldwide use and trading of the renminbi” and decided that the RMB can now be considered “widely used to make payments for global transactions” and “widely traded in the principal exchange markets”.
Advertisement
The author covers global financial and investment markets, central banking system with special focus on banking regulations & digital banking trends.
