Chinese currency, yuan, also known as renminbi has joined the elite club of world’s top currencies with the landmark decision taken by the International Monetary Fund (IMF) to add the currency benchmark basket of SDR currencies on Monday. The yuan already had met the IMF’s criteria for being widely used.
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The People’s Bank of China lowered yuan’s mid-point rate this August, in a bid to push the currency toward a more market-oriented reform.
“By effectively endorsing the renminbi as a freely useable currency, it sends a strong signal about China’s importance in the global financial markets”.
“The official endorsement of the RMB as a “freely usable” currency helps promote further worldwide use of the RMB and encourages continued RMB convertibility and capital account liberalization, in our view”, the bank’s analysts write. Indirectly, it might have a beneficial effect because the Korean economy depends so much on the yuan and this gives more legitimacy to having the Chinese yuan as a reserve currency.
The yuan gained around 0.4% and was trading at roughly 6.4240 a dollar at 3:23 pm at NY after the executive board of the International Monetary Fund voted to include it in the Special Drawing Rights that now includes the yen, pound, euro and dollar.
Some analysts have indicated that by 2030 the yuan will become one among the best three leading worldwide monies, with the euro as well as the dollar.
“Stimulation of direct won-yuan exchange deals can lead to more favorable direct exchange rates, ultimately lessening the transaction costs for Korean companies”, said Choi Ji-young, IMF team head of the Finance Ministry’s International Financial Bureau.
Export Criterion: To become a part of the basket, exports of a particular country shall have the largest value over a five-year period.
Mr Bridges said this marks the dominance of the USA dollar: “It signifies that the U.S. dollar is still all powerful and hasn’t changed and that’s not likely to change in probably the near term or even the medium term”.
Since 2009, China has signed currency-swap agreements with central banks in the UK, Brazil, Canada, Indonesia, South Korea and other countries. Money managers also predict central banks will add the yuan to reserve holdings slowly until Beijing lower its financial markets restrictions.
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Martin Wolf, the chief economic commentator for the Financial Times newspaper, said the IMF’s decision will have little impact on the use of the yuan internationally given that the SDR regime has been marginalized in the global monetary system.
