A Big Change is Coming for the Yuan

Beijing’s yuan is finally included in the elite group of global reserve currencies. However, it might take a long time before they become a major player in the international capital market scenes.

Analysts instead argued that the decision by the International Monetary Fund (IMF) on Monday to include yuan in the basket of currencies was highly political.

The change, which will be effective in October 2016, gives the yuan a 10.9% weight in the basket, behind the US dollar at 41.7% and the euro at 30.9%. However, it is ahead of the yen at 8.3% and the pound sterling at 8.1%.

Victory for China

The chance of being a major player in the international capital market is considered as a victory for China, including the People’s Bank of China governor Zhou Xiaochuan who argued that for yuan to be part of the SDR basket. They also see it as a testament that the economy of China is important around the world.

To be among the SDR, currencies need to be able to pass tests, such as being a large exporter (which has been satisfied by China since 2010).

Promoting Reforms in China

The IMF rewards Beijing for its economic reforms and encouraging the Chinese government to push through their plans of liberalizing their economy. However, Beijing is cautious of moving quickly. They are worried that if they liberalize their capital, it will flow out of their country.

Even though capital outflow has been reduced in the last few months, China has already gone through enough since last year. Beijing doesn’t want its forex reserve to drop too quickly. They have also found that reforming state-owned enterprises is taking longer than expected. Since then, anti-reform lobbyists have used slow economic growth to argue against liberalization.

Today, although yuan has been included in the SDR, it only accounts for 2.5% of the international transactions as opposed to 3% for the euro and 42% or the US dollar. That is why it seems unlikely for China to be pushing through complete financial liberalization any time soon.

US on China’s Inclusion to SDR

While the US (the biggest shareholder of the IMF) was not delighted to see the inclusion of yuan in the SDR market, it decided it would be more pragmatic not to argue to IMF’s decision.

Aside from that, the Obama administration seems to have given up on ratifying of the proposed reforms to the IMF by the end of 2015. These reforms were aimed to double the size of the capital to the IMF and strengthen developing countries within the basket.

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