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October 3, 2016

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Home » Business » Economy

Yuan joins elite club of reserve currencies

Source: Agencies | October 3, 2016, Monday | Print Edition

THE yuan’s inclusion in the International Monetary Fund’s elite reserve currency basket on Saturday was hailed by Chinese businesses and analysts as a “historic moment.”

“Ten years ago, the yuan could hardly go out of the country. But now China’s opening-up and huge economic size has made it more and more popular in the international market,” said Lu Jian, vice president of Guangdong Guangken Rubber Group Co Ltd.

Early this year, Guangken Rubber launched a US$270 million bid for Thailand’s Thai Hua Rubber, the world’s third-largest rubber producer.

The company then sought loans from domestic and overseas banks, with some offering to fund its bid in yuan.

The acquisition in yuan helps reduce foreign exchange risks as well as fund-raising costs, said Lu.

“Ten years ago, all our overseas business was conducted in the US dollars and we often did not have yuan clearing banks. It’s quite a different scenario now,” he said.

Today, China has 21 overseas yuan clearing banks across the world.

“Despite the fluctuations in the exchange rate, the international market has not lost interest in the yuan and on the contrary, global demand is increasing,” Lu said.

On Friday, the IMF announced the launch of its new Special Drawing Right basket, including the yuan, effective from Saturday, saying it was a “historic milestone” for China, the IMF and the international monetary system.

The inclusion makes the yuan one of the five reserve currencies fully endorsed by the 189-member organization, joining the US dollar, the euro, the Japanese yen and the British pound.

Now, the yuan accounts for the third-largest share of the new SDR basket with 10.92 percent, following the US dollar’s 41.73 percent and the Euro’s 30.93 percent.

“The yuan’s 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,” IMF Managing Director Christine Lagarde said.

The yuan has moved into the top 10 but still trails the other major currencies, according to the Bank for International Settlements.

Created in the 1960s, the “Special Drawing Right” is a unit of account used by the IMF as a foreign exchange reserve asset and is not a freely traded currency. To help manage financial crises, the IMF issues loans to member countries denominated in SDRs.

In July 2009, China approved pilot program for cross-border trade settlement in yuan, embarking on the internationalization process of the currency.

The yuan was the fifth most active currency for global payments by value in July, with a share of 1.9 percent, an increase from 1.72 percent in June, according to data from global transaction services organization SWIFT.

China’s central bank said on Saturday that the country will continue to push forward financial reforms and market opening after the yuan’s inclusion.

Zhang Lijun, a partner with PricewaterhouseCoopers China, said the yuan’s inclusion was of similar significance to China’s joining the World Trade Organization.

“The two cases also have showed that China helped to improve rather than topple global rules and this has positive significance for the coordination of global economic governance,” said Zhang.

Economy


 

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