Chinese yuan becomes a global currency

Thailand’s trade and investment will benefit in the long run from inclusion of the yuan in the special drawing rights (SDR) currency basket of the International Monetary Fund (IMF), says a senior central bank official.

Starting in October of next year, the Chinese yuan will become one of the world’s elite currencies.

Nikko Asset Management chief global strategist, interest rates and currencies Roger Bridges said the inclusion reinforces the importance of China’s ongoing reform agenda. Because Korea is one of the few financial centers right now which has a yuan market, that allows Korea to have more direct dealings with the yuan and perhaps gain more stability than perhaps if we just stick with the USA dollar.

With its inclusion of the RMB in the SDR basket, the International Monetary Fund is effectively declaring the Chinese currency as safe and reliable.

To meet the IMF’s “freely usable” criteria, Chinese authorities undertook a series of reforms in recent months, such as improving its foreign exchange rate formation system, opening up its interbank bond and forex markets, and improving data transparency by subscribing to the IMF’s Special Data Dissemination Standard (SDDS).

The value of the SDR will be based on a weighted average of the values of the basket of currencies comprising the United States dollar, euro, the Chinese renminbi, Japanese yen, and British pound.

If China consistently devalues its currency, it may be a risk to local companies which export heavily to the world’s secondlargest economy or compete with that country in export markets, the analyst said. “Inflows can also create currency mismatches with firms and banks borrowing in foreign currency”, the report said, adding that this “can increase financial fragility as a sudden reversal of inflows can lead to a large and disorderly depreciation of the local currency”. He said Lagarde was determined to include the yuan in the basket in a bid to prod China toward establishing full convertibility for its currency.

According to the forex reserves movement figures on the Central Bank of Nigeria’s (CBN) website, the reserves derived mainly from the proceeds of crude oil sale, remained within the band of $30 billion throughout November.

He said the move will have major impact on dollar dominated trade.

Currencies listed in the SDR basket of the global lender can be used as an alternate means to settle worldwide transactions among member countries.