Posts tagged: renminbi

Historical event: IMF gives China’s currency prized reserve asset status

“The International Monetary Fund on Monday admitted China’s yuan into its benchmark currency basket in a victory for Beijing’s campaign for recognition as a global economic power. The IMF executive board’s decision to add the yuan, also known as the renminbi, to the Special Drawing Rights (SDR) basket alongside the dollar, euro, pound sterling and yen, is an important milestone in China’s integration into the global financial system and a nod to the progress it has made with reforms.

To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours. The currency will have a 10.92 percent share, in line with expectations, after a review of the weightings formula for the SDR, which determines which currencies countries can receive as part of IMF loans.

The yuan’s inclusion is a largely symbolic move, with few immediate implications for financial markets. But it is the first time an additional currency has been added to the SDR basket and the biggest change in its composition in 35 years. Last set in 2010, the basket is currently 41.9 percent dollar, 37.4 percent euro, 11.3 percent sterling and 9.4 percent yen.

The yuan СNH=CNY would not join until October 2016, allowing reserve managers time to prepare. Under the new formula, the euro’s share will drop to 30.93 percent. Sterling and yen will also have lower weights while the dollar remains about the same.

To be included in the SDR basket, the yuan had to meet the criteria to be “freely usable,” or widely used to make international payments and widely traded in foreign exchange markets – a yardstick it missed at the last review in 2010. The addition is likely to fuel demand for China’s currency and for renminbi-denominated assets as central banks and foreign fund managers adjust their portfolios to reflect the yuan’s new status. Currency analysts estimate the IMF seal of approval could fuel demand worth more than $500 billion in coming years and take the yuan’s share of global reserve holdings to around 5 percent, overtaking the Canadian and Australian dollars.

In a factsheet accompanying the decision, the IMF said that since Chinese interest rates were higher than those of other currencies, it was likely that the SDR interest rate would rise as a result of the yuan’s inclusion. Read more »

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The Path of the Chinese Currency Devaluation

“There was a frenzy of speculation about Chinese currency devaluation earlier this year after a series of surrise moves that weakened the yuan (also called the renminbi) against the dollar. For all the discussion, the yuan has fallen by only about 3% in value against the dollar in 2015.

McKinsey estimated that Chinese debt has quadrupled since 2007 and its debt to GDP ratio has risen above that of the US. The question is, given the semi USD/RMB peg and China’s increasing open capital account (which come at the expense of China’s monetary independence), whether China can live with higher US interest rates and a higher US dollar. A weaker currency generally would boost China’s export potential and might help to prop up its flagging growth figures.

The yuan has actually strengthened in general over the past decade. It is still up by about 6.5% against the greenback since the middle of 2010 and up by 22.8% in the past 10 years, since the currency was unpegged from the dollar in 2005.

But before that period of pegging, you can see how massively the currency was devalued over a 15-year period, rising from less than two to the dollar in the early 1980s to over eight to the dollar by 1994“.

 

USDCNY long term

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