While reaction to the yuan’s almost-certain inclusion in the worldwide Monetary Fund’s (IMF) basket of reserve currencies has been muted, the move shows the global economy is getting more diversified, say analysts.
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“Our understanding is that the International Monetary Fund board of directors will discuss the matter and hopefully take a decision on it”, China’s special envoy on Group of 20 affairs, Wang Xiaolong, said on the sidelines of the summit in Turkey on Monday. See MNI Main Wire stories at 7:16 a.m. ET and 6:16 a.m. ET for further details.
William T. Wilson, Ph.D., a senior research fellow at the Heritage Foundation, in a research report published August 17 titled “Washington, China, and the Rise of the Renmimbi: Are the Dollar’s Days as the Global Reserve Currency Numbered?” argues the fall of the dollar has been accelerated by the relatively slow growth of the USA economy since 2009 and the accumulation of a sovereign debt set to double in the eight years Obama is in office.
Joining the basket would give the yuan the IMF’s seal of approval and might encourage foreigners to use the Chinese currency more and to have more confidence in China’s financial markets.
The IMF’s approval also confirms another equally important possibility, which economists highlighted during the weeks in August when the sudden (though predictable) devaluation of China’s currency prompted many to think that a unsafe currency war in the offing.
“Foreign investors tend to hold a low share of Japanese equities, and their Japanese government bond holdings are well below benchmark indices”, the analysts said.
“The yuan was already a reserve currency before its inclusion in the SDR basket”.
Market players also debated the effects stemming from SDR inclusion on the dollar-yuan exchange rate.
“We do not believe this number changed substantially in October, given a slight increase in FX reserves and a $62 billion trade surplus”, he said.
Going forward, there are three avenues that the People’s Bank of China might explore in terms of allowing additional dollar-yuan volatility, Tennengauzer said.
“The first could be immediately following the SDR membership announcement following the Thanksgiving weekend”, which “may provide enough room before the next FOMC on Dec 18”, he said. Having long ago earned the status of preferred market for Asian investments in the West, Britain now finds itself best placed to benefit from the inevitable explosion of transactions conducted in the Chinese currency. HSBC has 6.50 price target for the year-end.
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As a result of the latest move, tightening liquidity has pushed the short-term HIBOR rate tracking offshore yuan liquidity in Hong Kong up by 36 basis points to around 4 percent.
