Yuan’s globalization: Another step closer to international currency status

Yuan’s globalization: Another step closer to international currency status

 

Yuan's globalization: Another step closer to international currency status

Another step closer to international currency status

MASAHIRO OKOSHI, Nikkei staff writer

BEIJING — The yuan will attain recognition as a key currency when the International Monetary Fund includes it in a benchmark currency basket, a move expected to take place as early as November.

The inclusion of the yuan in Special Drawing Rights, the IMF’s international reserve asset, marks a big step in China’s effort to become a major power that rivals the U.S.

The composition of the SDR basket is reviewed every five years. The IMF’s executive board will likely vote to include the yuan during a meeting planned for late November.

The basket currently comprises the dollar, euro, yen and pound. If a nation allocated SDR finds itself embroiled in a currency crisis, that country can sell part of its rights to other IMF members in exchange for those reserve currencies.

The yuan was long considered an unfit reserve currency, given its lack of international usability. Inclusion in the SDR basket would signal that the yuan is now sufficiently usable outside of China, and thus fit for reserve-currency status. Recognition would likely spur buying of yuan as more nations seek to build up their holdings.

Countries held around 670 billion yuan ($105 billion) in foreign currency reserves at the end of April, the People’s Bank of China said, accounting for around 1% of the worldwide total. Some predict that inclusion in the SDR basket would lead to global reserves equivalent to $1 trillion — 10% of the world total — being exchanged for yuan.

Middle road

China began after the 2008 financial crash to push in earnest for wider use of the yuan in international trade and investment — largely an effort to reduce the sway of U.S. policy over China’s economy by cutting dependence on the dollar. But immediately abolishing all foreign exchange restrictions could leave the yuan market unstable. Inclusion in the SDR was chosen as a safe middle road, allowing some restrictions to remain while promoting the currency’s international use.

The yuan’s sudden devaluation on Aug. 11 was largely intended to boost the yuan’s chances of obtaining reserve-currency status. The central bank had until then set the median exchange rate for the yuan on a given day at an artificially high level. The decision to bring the guidance rate downward regardless of potential market confusion came after the IMF took note of the gap between the bank’s propped-up rate and the free-market rate.

A number of European nations eager to grow ties with China are now voicing support for the yuan’s bid, mirroring decisions earlier this year to sign on to the China-led Asian Infrastructure Investment Bank. The U.K. came out in favor of the yuan’s bid at an IMF conference in Peru in October. Germany also signaled its support.

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