China’s yuan success hinges on reform

Beijing, December 1

The International Monetary Fund (IMF)’s recognition of China’s currency is a step towards encouraging its global use, but banks will remain reluctant to hold yuan unless Beijing pushes deeper financial reforms, analysts say.

The Washington-based institution on Monday welcomed the yuan into its elite reserve currency basket known as ‘Special Drawing Rights’, recognising the ascendance of the Asian power, already the world’s second largest economy.

It is a symbolic victory for Beijing, which has spared no efforts to strengthen the international role of the yuan — also called the renminbi (RMB) — and its acceptance as a reserve currency.

China’s is the fifth most widely used currency in international payments but accounts for less than three per cent of transactions.

That compares with over 43 per cent for the US dollar, and nearly 29 per cent for the euro, global transactions organisation SWIFT said in October.

Analysts believe the IMF decision’s impact on foreign exchange markets will be muted, though it will encourage central banks to speed up diversification of their currency reserves by buying yuan.

“There is no obligation for central banks to align their forex reserve holdings with the SDR basket, but in practice, they pay a lot of attention to the basket’s composition and weights,” said Dariusz Kowalczyk, senior emerging market strategist at Credit Agricole.

“This pattern will also materialise in the case of the renminbi,” he said. “It simply makes sense to diversify reserves into an emerging market that is also a global economic superpower.”

He forecast the move could eventually imply yuan buying of the equivalent of up to $110 billion annually.

However, such a development will not be achieved overnight and depends on reforms undertaken by Beijing, including opening its tightly-controlled onshore financial market, allowing more capital outflows and widening the trading band for the yuan, ANZ Banking Group said.

The yuan can only move up or down two per cent against the US dollar from a mid-rate set daily by the central bank.

“It will take time for the RMB to become a popular global asset,” ANZ said in a research report last month.