On Monday, the International Monetary Fund or IMF has declared that the Chinese yuan now belongs to the elite list of currencies that only includes the British pound, the euro, the Japanese yen and the U.S. dollar. This elite list is called the Special Drawing Rights basket, the group that is used to value the assets managed by central banks to help the countries defend against fluctuations in exchange rates. The IMF reviews the special basket every five years.
The announcement marks the start of the journey of the yuan (Renminbi) as one of the most important currencies in the world, although the actual start would be on October 1, 2016 yet, thus there would be no immediate impact on the financial markets around the globe.
It may not have a significant impact as of today, but it is still a sign that China continues to rise and move further in the global stage. Nomura Securities predicts that the yuan will be one of the three major currencies used internationally by 2030 – almost on the same level as the euro and the U.S. dollar.
Still this hinges on whether the country would continue to implement financial reforms, which had been one of the main reasons for the IMF decision to elevate the Chinese currency to the elite list. According to the IMF, the decision is an important step to integrate the Chinese economy into the financial system of the world, which could bring about a stronger and healthier financial and international monetary system.
The yuan, according to Nomura is still a minority in the international currency market although its daily trading volume between the years 2010 and 2013 had tripled. China had been working to effect several economic reforms, such as access to its stock markets by foreign investors.
Making things transparent
China is known to exercise secrecy in many of its financial dealings, and with the new developments, everything will depend on how transparent the country wants to be, if it wants the yuan to move to the next step of the process, which had been Beijing’s ambition for a long time.
However, China’s economic growth is slowing down and analysts are saying that these are worrying signs. This means that either the government is withdrawing some of its financial reforms or those who are in charge of these reforms lack the right know-how to implement them. One of the events analysts cited was the devaluation of the yuan this year that surprised the markets. The People’s Bank of China was heavily criticized for their mishandling of the communication that surrounded the unfolding of the events.
With the forthcoming entry of the yuan as one of the top important currencies in the global stage, it’s predicted that it would put more pressure on the Chinese officials and their moves would be scrutinized by the rest of the world. It means that whatever financial reforms Beijing implements must be meaningful.
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