Yuan el­e­vated to elite club of cur­ren­cies

China Daily (USA) - - FRONT PAGE - By WANG YANFEI in Bei­jing and CHEN WEIHUA in Wash­ing­ton

The in­clu­sion of the ren­minbi among the elite re­serve cur­ren­cies of the In­ter­na­tional Mone­tary Fund over the week­end will push ahead re­forms linked to the cur­rency’s in­ter­nal­iza­tion and mar­ke­ti­za­tion, ac­cord­ing to econ­o­mists. They also dis­counted spec­u­la­tion it would prompt a sharp de­pre­ci­a­tion of the cur­rency.

The IMF ap­proved the yuan as the fifth elite cur­rency to join the spe­cial draw­ing rights bas­ket, which is a for­eign ex­change re­serve as­set that in­cludes the US dol­lar, euro, yen and the British pound.

“The ex­pan­sion of the SDR bas­ket is an im­por­tant and his­toric mile­stone for the SDR, the Fund, China and the in­ter­na­tional mone­tary sys­tem. It is a sig­nif­i­cant change for the Fund, be­cause it is the first time since the adop­tion of the euro that a cur­rency is added to the bas­ket,” IMF Man­ag­ing Di­rec­tor Chris­tine La­garde told re­porters at the IMF head­quar­ters in Wash­ing­ton on Fri­day.

“The ren­minbi in­clu­sion re­flects the progress made in re­form­ing China’s mone­tary, for­eign ex­change, and fi­nan­cial sys­tems, and ac­knowl­edges the ad­vances made in lib­er­al­iz­ing and im­prov­ing the in­fra­struc­ture of its fi­nan­cial mar­kets,” La­garde said.

“The con­tin­u­a­tion and deep­en­ing of th­ese ef­forts, with ap­pro­pri­ate safe­guards, will bring about a more ro­bust in­ter­na­tional mone­tary and fi­nan­cial sys­tem, which in turn will sup­port the growth and sta­bil­ity of China and the global econ­omy,” she said.

“The RMB’s ac­qui­si­tion of SDR sta­tus marks a mile­stone, which is equiv­a­lent to that of China’s en­try into the World Trade Or­ga­ni­za­tion in 2001,” said He Zhicheng, for­mer se­nior economist with the Agri­cul­tural Bank of China.

“But it only marks the be­gin­ning on its jour­ney to be­come a global re­serve cur­rency,” He said. “It would prompt the gov­ern­ment to move ahead with re­forms in the fi­nan­cial sec­tor.”

The ren­minbi has leapfrogged other cur­ren­cies to oc­cupy the third­largest share of the new SDR bas­ket at 10.92 per­cent, fol­low­ing the US dol­lar’s 41.73 per­cent and the euro’s 30.93 per­cent.

Ris­ing de­mand for yuan as­sets brought by in­clu­sion in the SDR bas­ket will push China to deepen re­form and the in­ter­na­tion­al­iza­tion of yuan, at a time when China is be­com­ing more in­te­grated into the global mar­ket, ac­cord­ing to Zhao Xue­qing, an economist with the In­sti­tute of In­ter­na­tional Fi­nance, a think tank af­fil­i­ated with the Bank of China.

The ren­minbi has been the fifth­most-used cur­rency for global pay­ments for the sec­ond con­sec­u­tive month, ac­cord­ing to SWIFT, the global trans­ac­tion ser­vice.

Yuan-dom­i­nated di­rect in­vest­ment saw rapid growth from Jan­uary to Au­gust, when the to­tal reached 1.62 tril­lion yuan ($242 bil­lion), up 61.7 per­cent year-on-year.

Over the past decade, the world has wit­nessed the rapid rise of the Chi­nese cur­rency.

But the SDR in­clu­sion’s im­pact on the gov­ern­ment’s tight­en­ing of con­trols over the yuan’s ex­change rate will be rather min­i­mal, ac­cord­ing to Sun Li­jian, an eco­nomics pro­fes­sor with Shang­hai-based Fu­dan Uni­ver­sity.

Sun played down spec­u­la­tion that the cen­tral bank would al­low a sharp de­pre­ci­a­tion right af­ter the yuan’s in­clu­sion.

While the yuan does face a cer­tain level of de­pre­ci­a­tion pres­sure against the US dol­lar, mainly driven by a po­ten­tial US in­ter­est rate hike in De­cem­ber, it “does not face long-term de­pre­ci­a­tion pres­sure”, he said.

“The RMB’s in­clu­sion into the SDR bas­ket, with its ris­ing sta­tus as global cur­rency, can be a hedge against the pres­sure of de­pre­ci­a­tion, if any­thing,” he said, re­fer­ring to the fact that cap­i­tal in­flows brought by in­creas­ing de­mand for yuan as­sets would help sta­bi­lize the ex­change rate.

Lian Ping, chief economist with Bank of Com­mu­ni­ca­tions, shared sim­i­lar views and said that the yuan’s ex­change rate de­pends more on the fun­da­men­tals of the econ­omy and mar­ket ex­pec­ta­tions.

“In­clu­sion of the RMB in the SDR is an im­por­tant sig­nal that China has made a lot of progress with fi­nan­cial re­form and the RMB has be­come an in­ter­na­tional cur­rency,” said David Dol­lar, a se­nior fel­low at the John L. Thorn­ton China Cen­ter of the Brook­ings In­sti­tu­tion in Wash­ing­ton.

He said in or­der to be a ma­jor re­serve cur­rency, China needs to con­tinue re­form, strength­en­ing trans­parency and re­li­a­bil­ity of cap­i­tal mar­kets and open­ing up more to the global econ­omy.

Rory MacFar­quhar, a vis­it­ing fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nomic and a for­mer se­nior of­fi­cial at the White House Na­tional Se­cu­rity Coun­cil, said the in­clu­sion of the RMB in the SDR is putting new re­spon­si­bil­ity on China.

“Those ba­si­cally come down to the way China thinks of its cur­rency, thinks of its eco­nomic man­age­ment as in global terms,” he said.

“The de­ci­sion is very good for China, IMF and in­ter­na­tional fi­nan­cial sys­tem,” said Eswar Prasad, the Tolani Se­nior Pro­fes­sor of Trade Pol­icy at Cor­nell Uni­ver­sity. The for­mer IMF chief in China be­lieves it will be good for push­ing for­ward China’s in­ter­nal re­form, es­pe­cially in the fi­nan­cial sec­tor.

He also be­lieves it’s good in terms of mak­ing China a stake­holder of IMF and bring­ing on board the emerg­ing mar­kets, which feel some­what un­fairly treated in the in­ter­na­tional fi­nan­cial gov­er­nance.

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