Chinese Yuan is no longer an unknown quantity. A mild official depreciation of the currency by People’s Bank of China (PBoC) in August was sufficient to send tremors across global markets. Shares fell by record margins, and reactions could be felt across the crude oil, metals and other commodity markets. The dragon had to make assurances of no further depreciations for markets to stabilize, with an eye on Beijing.
So, it was only a matter of time that the Chinese Yuan was accepted as the fifth reserve currency by the International Monetary Fund (IMF) beginning Oct 2016. The move bestows upon the world’s second largest economy a status it clearly deserves.
It is also a recognition of emergence of Chinese as an undisputed global power, the decline of Europe, a potential challenge for the U.S and a clear shifting of global economic axis to Asia. Under the new weights, the biggest loser will be the British pound, euro and the Japanese yen. The $10.5 trillion economy accounts for almost 15 per cent of the global GDP, and is one of the biggest trading partner across the globe. That also makes it five times Indian GDP.
The IMF in a statement said - the SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is currently based on a basket of four major currencies, and the basket will be expanded to include the Chinese Renminbi (RMB) as the fifth currency, effective October 1, 2016. SDRs can be exchanged for freely usable currencies. As of November 30, 2015, 204.1 billion SDRs had been created and allocated to members (equivalent to about $285 billion).
What are the immediate implications of the so-called internationalisation of the Yuan? First, because of its almost 11 percent share in the basket, demand for Yuan is bound to rise. Then, the Chinese authorities will no longer be able to manage their currency, and must be prepare for greater volatility.
Depending on the way one looks at it -- the best part of entering a free market or the trouble of doing so is the requirement to provide information and data that is creditable, globally accepted and passes any scrutiny. And why not. It’s only fair to furnish to a currency buyer – trader, banks, or central banks --all possible information for them to be comfortable.
China too was quick to react.
"The international community expects China to play a more active role in global economy and finance, the PBOc said in a statement. ``China will speed up the effort to promote financial reforms and opening.’’
Then, it’ll be interesting to watch how global currency players as also the Chinese government respond to any rise in demand for the yuan. Barring adjustments – small and dramatic – the net result can only be positive for global markets and trade.
Standard & Poor’s Asia Pacific chief economist, Paul Gruenwald says - ``The inclusion of the yuan in the SDR basket was a tectonic change, but the big task facing the Chinese authorities is to convince the private sector to hold yuan for reasons other than trade facilitation.’’
As of now, the yuan is largely a trade currency, with minimal private holdings for store-of-value reasons. Liquidity is guaranteed for official sector trades under the People's Bank of China's bilateral swap agreements with various central banks. No such guarantees exist for the private sector, which is therefore at the mercy of any market interventions by the authorities. If markets trust the PBOC, then this is not a serious issue. But we are not there yet, said Gruenwald.
Could that mean rupee will be a future contender to a similar spot? Very unlikely. India has been slow, justifiably so, in opening its currency markets to the extent a global trader may want us to. For all other investors, the rupee is fully convertible and puts no restrictions on capital flows either side. Yet, considering the size and strength of its economy, it will be some time before India can aspire for similar status. But does it really need to? Nah..
