China needs more reforms to make yuan true reserve currency

According to Christine Lagarde, Managing Director of the International Monetary Fund, it is an important milestone in the integration of the Chinese economy into the global financial system.

China’s yuan currency has been approved by the International Monetary Fund for addition to its exclusive basket of reserve currencies, which some analysts think will add a further pressure on commodities.

Some analysts argue that including the yuan in the SDR basket will prompt central banks and private investors around the world to increase their yuan-denominated holdings.

Meanwhile, Nigeria’s external reserves depreciated by $238 million in November to $30.012 billion as at November 27, 2015, compared with the $30.250 billion it was as at November 2.

China is known to exercise secrecy in many of its financial dealings, and with the new developments, everything will depend on how transparent the country wants to be, if it wants the yuan to move to the next step of the process, which had been Beijing’s ambition for a long time.

Not every currency included in the SDR basket becomes a major reserve currency.

The SDR is an asset that functions nearly like a currency.

Those reforms include making it easier for foreigners to access Chinese currency markets, more frequent debt issuance and expanding trading hours for the yuan, according to Reuters.

The yuan can only move up or down two per cent against the USA dollar from a mid-rate set daily by the central bank. Just four other countries hold the same designation – the USA dollar, euro, Japanese yen and British pound.

Martin Wolf, the chief economic commentator for the Financial Times newspaper, said the IMF’s decision will have little impact on the use of the yuan internationally given that the SDR regime has been marginalized in the worldwide monetary system.

Monetary authorities are also expected to soon start a programme allowing individuals to make direct outbound securities investments; raise the quota for two-way securities investments under pre-existing arrangements, and launch a stock connect scheme between the Shenzhen and Hong Kong bourses.

 “Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance”, – the PBOC said in a statement.

If the United States dollar does continue its upward trajectory, GaveKal believes that the People’s Bank of China “would not stand in the way” of a fall in the renminbi’s exchange rate from RMB6.4 now to RMB6.8 to the greenback, should the latter gain 10% or more over the next six to 12 months.