China’s yuan has seen a giant leap in the efforts to become a global currency and one of the world’s reserve currencies.
The International Monetary Fund (IMF) announced on Nov. 30 that the Chinese unit will be included into the SDR basket, joining major currencies such as the US dollar and euro.
It’s a milestone for the yuan to become a global currency. It’s also a sign that Beijing would further liberalize the financial market and capital account to assist the nation’s broad economic reform.
The redback was used only on the mainland a decade or more ago. It was rarely used in external trade, and there was no offshore renminbi bond market.
But now over a fourth of China’s foreign trade is settled in yuan. And Beijing has launched various schemes, allowing foreign investors to access mainland equities and bonds.
Meanwhile, a massive offshore yuan capital pool has been forged, which enabled the currency to be used in trade settlement and investment. Hong Kong has become the world’s largest offshore renminbi centre with deposits of over 1 trillion yuan.
China has been deepening its yuan internationalization. The SDR inclusion reflects success of the nation’s financial market reform. The market widely expects the redback to achieve full convertibility in the coming years.
It’s an assurance for the long-term outlook of renminbi. The currency will have sufficient liquidity, move steadily and help preserve wealth.
In addition, the inclusion will enhance global companies and organizations’ confidence in the renminbi, encouraging them to use the currency to settle trade and make investment in yuan-denominated assets.
The move will help boost market confidence in the redback.
Also, it would prompt some central banks to adjust their yuan holdings. The yuan will have a 10.92 percent weighting in the SDR basket, higher than the ratio of pound sterling and Japanese yen.
As of end in 2015, the redback will account for 2.9 percent in world’s total foreign exchange reserves. The ratio will increase to 10 percent by 2025.
More importantly, the SDR inclusion shows that Beijing will further open up its financial markets and capital accounts.
Prior to the five-year SDR basket review, the IMF already said that China has been accelerating its financial reforms in a bid to make the yuan join the SDR basket.
In July this year, the Chinese central bank eased its grip on the nation’s interbank bond market to allow participation by other central banks and sovereign wealth funds.
In August, it introduced changes to daily fixing of renminbi against the dollar in the foreign exchange market.
Meanwhile, China expanded the RQFII quota for South Korea and Singapore last month, and expanded the scheme to Malaysia.
The SDR inclusion does not mean China’s economic reform is ending. Instead, it would prompt Beijing to adopt more measures to facilitate two-way capital flows.
The Shanghai-Hong Kong Stock Connect program has enabled investors on both sides to access each other’s market. And similar trade link with Shenzhen is under planning.
Meanwhile, China intends to launch a program for individual investors to invest overseas. The move might unleash several billion yuan of deposits into global stocks, bonds and real estate.
Currently, Beijing imposes a cap on capital inflows into China for foreign investors. The cap is set to be removed eventually. And various cross-border investment schemes might also integrate.
China is trying to rebalance its economy toward consumption, services and high-end manufacturing. It will further liberalize the capital account.
This article appeared in the Hong Kong Economic Journal on Dec. 18.
Translation by Julie Zhu
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