J Ahmad: This could work both ways because although it is true that more accessibility of theyuan could increase capital outflows from China, the move to introduce the yuan into the SDR signifies how important China has become to the global economy and could also encourage further purchasing of the Chinese yuan.
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China is the world’s second largest economy and the addition is a victory for its push to make the yuan a freely usable currency.
Earlier in the day, International Monetary Fund managing director Christine Lagarde announced the inclusion of the Chinese yuan in the agency’s SDR currency basket.
But in the long term, its inclusion could encourage the Chinese central bank to take a more hands-off approach to the currency’s movement and stay on the financial reform track, he said, adding that the yuan would then play a greater role in global trade and financial markets.
Xinhua said following the announcement, the central parity rate of the yuan weakened by 11 basis points to 6.3973 against the USA dollar today, according to the China Foreign Exchange Trading System.
The IMF designation, an accounting unit known as the special drawing rights, bestows global importance.
China has been lobbying for the International Monetary Fund to add the yuan to its basket of reserve currencies, which it uses to lend to sovereign borrowers, The Guardian Newspaper of London reported. The inclusion of the RMB is meant to enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.
Some analysts have indicated that by 2030 the yuan will become one among the best three leading global monies, with the euro as well as the dollar.
The highest weightage will continue to be for the dollar at 41.73% followed by Euro at 30.93%, the Renminbi with 10.92%, the Japanese Yen with 8.33% and the pound sterling with 8.09%. The average is used as a measure of value for the IMF’s “special drawing rights”, which quantify how much reserve currency each of the 188 member countries can call on. At the same time China has initiated efforts to encourage use of Renminbi assets by non-residents and also ensured availability of new instruments for hedging currency risks.
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“My view is that if the Chinese follow the IMF’s advice of allowing their currency to be more market determined and to further open up their capital account, the Chinese currency would depreciate a lot as Chinese residents would send capital overseas”, he tells The Daily Caller News Foundation. The move (yuan as a reserve currency) would see an improved demand for the currency from 2016 upon implementation. “The US dollar remains the dominant currency but this is certainly an important development”. China has what it takes to be the world’s superpower.
