China’s yuan falls on strong dollar, in line with weaker midpoint

The worldwide Monetary Fund Staff announced Friday that the RMB fulfills all criteria they take into account and, thus, recommends the inclusion of the Chinese currency in the Fund’s Special Drawing Rights (SDR).

Steve Englander, global head of G-10 FX strategy at Citi FX said the “inclusion of RMB in the SDR is no surprise, although it will probably be viewed as a plus for Chinese policymakers who have faced challenges on the economics and asset markets this year”. But rarely in their 46-year history have SDR commanded such rapt attention than now in the wake of China’s efforts to make the yuan (officially called the renminbi or the “people’s currency”) a global currency.

Joining the basket would give the yuan the IMF’s seal of approval and might encourage foreigners to use the Chinese currency more and to have more confidence in China’s financial markets. USDCNH held at CNH6.4014 in USA action Monday, down from an earlier high of CNY6.4206.

Within China the move is set to be considered a victory for financial reformers such as Governor Zhou Xiaochuan and it should thus strengthen their case for continuing with financial and economic reform.

Among the advantages of being a reserve currency, Wilson notes “the reserve-currency countries have the ability to run up fiscal debts denominated in their own currency at relatively low interest rates”.

The central parity rate of the yuan against the USA dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.

“The worldwide supply of two key reserve assets – gold and the USA dollar – proved inadequate for supporting the expansion of world trade and financial development that was taking place”, explains the IMF “Factsheet” on SDRs.

Point 19 of the final communiqué from the 2009 G20 summit in London specified: “We have agreed to support a general SDR which will inject $250 billion into the world economy and increase global liquidity”. It would be the first change in the SDR’s currency composition since 2001, when the euro replaced the German deutsche mark and French franc.

“The yuan was already a reserve currency before its inclusion in the SDR basket”. Having long ago earned the status of preferred market for Asian investments in the West, Britain now finds itself best placed to benefit from the inevitable explosion of transactions conducted in the Chinese currency.

The Renminbi, which means “the people’s currency” in Mandarin, was first issued in December 1948 with the establishment of the People’s Bank of China.