China | China needs more reforms to make yuan true reserve currency

China needs more reforms to make yuan true reserve currency

December 1, 2015 12:41 PM (UTC+8)

 

Getting the yuan into the International Monetary Fund’s special drawing rights (SDR) basket of currencies may have been the easy part. Making it relevant and getting the rest of the world to accept it, is going to take some work.

On Monday, the IMF said it would include the Chinese currency into the SDR, its basket of reserve currencies, which already include the US dollar, euro, yen and British pound. The change will take effect on Oct. 1, 2016.

Yuan banknotes are seen in this picture illustration taken in Beijing November 1, 2010. REUTERS/Petar Kujundzic

IMF managing director Christine Lagarde called the decision “an important milestone” in the integration of China’s economy into the global financial system, and said it also recognizes the progress that Chinese authorities have made in recent years in reforming monetary and financial systems.

With only 38 central banks holding yuan-denominated reserves, many say that including the yuan in the SDR basket will prompt central banks and private investors around the world to increase their yuan-denominated holdings. As of now these banks hold about 780 billion yuan, or 1.1% of total foreign reserves held by central banks around the world.

However, others call the move largely symbolic. Barry Eichengreen, a professor at the University of California Berkeley, told Chinese news agency Caixin that the IMF’s decision is symbolic because many investors were already aware of the rising status of the yuan as an international currency.

Other analysts said the inclusion of the yuan in the SDR basket will further facilitate the internationalization of yuan, but this doesn’t mean China’s currency will automatically become a global reserve currency

The first step to true reserve status on par with the pound and yen, will depend on China maintaining growth of 6% to 7% over the next decade, Zhang Ming, a Chinese Academy of Social Sciences professor who specializes in international investment research, told Caixin.

On top of that the yuan’s international status will be determined by how much China is willing to reform its exchange and interest rate regimes, as well as the opening up and reforming of its financial markets to make them more aligned with the international standards of other global markets.

To offset fears that a more freely traded yuan, also known as the renminbi, may see more volatility and raise the risk of capital flight, or experience another devaluation in the wake of the IMF decision, China’s central bank on Tuesday held a news briefing to say the currency would remain stable

“There’s no ground for continued devaluation of renminbi as China’s economy keeps growing at a speed of medium-to-high level with a huge trade surplus and ample foreign exchange reserve,” said Yi Gang, vice-governor of the People’s Bank of China, as reported by China Daily. “In addition, both foreign and outbound direct investments are increasing.”

“Inclusion of yuan in the basket doesn’t immediately change our current exchange rate system,” he added. “The system will steadily shift to a clean floating one…It takes time.”

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