No basis for yuan’s continued depreciation: China’s central bank

The IMF announced yesterday that it would include the Chinese Yuan Renminbi having met its criteria to be included in its Special Drawing Rights (SDR) basket.

“There is no obligation for central banks to align their forex reserve holdings with the SDR basket, but in practice they pay a lot of attention to the basket’s composition and weights”, said Dariusz Kowalczyk, senior emerging market strategist at Credit Agricole.

The yuan will have a 10.92 percent share, higher than sterling and yen, which will drop to 8.09 percent and 8.33 percent respectively, while the dollar remains broadly unchanged at 41.73 percent.

“There is no basis for the continued depreciation of the yuan, and China is capable of keeping the currency basically stable at a reasonable level”, it quoted central bank vice governor Yi Gang as saying.

The unexpected devaluation of the yuan last August received good marks from the International Monetary Fund as it expanded the currency’s movements based on market forces.

“Effective Oct. 1, 2016, the yuan is determined to be a freely usable currency and will be included in the SDR basket as the fifth currency, along with the USA dollar, the euro, the Japanese yen and the British Pound”, the International Monetary Fund said in a press release.

“The Executive Board’s decision to include the RMB in the SDR [special drawing rights] basket is an important milestone in the integration of the Chinese economy into the global financial system”, Lagarde said.

A reserve currency is regarded as a strong currency, widely used in global trade and that central banks will hold as a component of their foreign exchange reserves.

He said the move will have major impact on dollar dominated trade. The Euro and pound will be the big losers when the basket is reweighted, falling from 37.4% and 11.3% respectively.

For that, says Swiss bank UBS, Beijing needs to continue financial reforms and capital account liberalisation to improve the efficiency of capital allocation in China.

But some critics cautioned that the nation’s possible heavy reliance on the yuan could increase Korea’s exposure to sudden worldwide financial market shocks.

“What is important is the data”.

The internationalization of a country’s currency usually involves three phrases: being used as an worldwide trade settlement currency, turning into an investment currency, being treated as a reserve currency. Private sectors will also be encouraged to gradually buy more yuan-denominated assets. They tend to be very conservative and would adjust their portfolio in a very gradual manner. In a statement, IMF Managing Director Christine Lagarde noted the yuan’s inclusion is a “clear representation of the reforms” taking place in China. “Inclusion will re-enforce the trend”.