Yuan gets stamp of approval from IMF

China loosens its tight grip on management of its own currency

Chinese cash: The country has been loosening its grip on management of the yuan for a while. Photograph: REUTERS/Lee Jae-won

Chinese cash: The country has been loosening its grip on management of the yuan for a while. Photograph: REUTERS/Lee Jae-won

 

It wasn’t all bad news for China last week and many here were cheered by the news that the yuan, also known as the renminbi (RMB), would be included in the IMF’s SDR basket with a weight of 10.92 per cent, becoming the fifth currency in the basket.

Wang Tao’s team at UBS says inclusion will not trigger compulsory RMB purchase overnight but may give the yuan a ‘stamp of approval’, which could lead to increased yuan holdings by official and private asset managers over time, the bank said. An important factor is that SDR is used to catalyse financial market reforms.

“While joining SDR may not bring immediate material benefit to China, the significance has and will continue to lie in all the necessary financial reforms and capital account opening to achieve the positive outcome and further advancing RMB internationalisation,” UBS said.

Kamel Mellahi, professor of strategy at Warwick Business School, said the inclusion was a huge symbolic victory for China, but comes with strings attached.

“China has been loosening its tight grip on the management of the yuan for a while, but now the PBoC [People’s Bank of China] is going to come under immense pressure to be more transparent and improve its way of communicating with international markets. This requires massive cultural and procedural changes.”

In the long term, this could see the yuan challenge the dominance of the greenback as the global reserve currency of choice, but in the short term the main impact is likely to be the flow of about $150 billion (€140 billion) of foreign currencies into Chinese bonds, he said.

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