David Marsh: China's Switch on Yuan Reinforces Bid to Join Elite Currency Club

2015-08-17 IMI

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF) After last week’s changes in Chinese arrangements for handling the yuan’s exchange rate, the contours of the currency’s expected entry into the special drawing right next year are becoming clearer. Last week’s roller-coaster decline of the yuan (also known officially as the renminbi) against the dollar USDCNY, -0.2029% was widely portrayed as a “devaluation” that could disrupt world capital markets and possibly derail Beijing’s plan to become part of the International Monetary Fund’s composite currency unit. However it is more probable that the adjustment in the dollar-yuan link forms a central element in an orchestrated strategy with the IMF that increases the likelihood that the yuan will indeed join the SDR, in a decision that would be implemented in September 2016. Another indication of a harmonized plan on SDR adhesion came with Friday’s release of gold data by the People’s Bank of China (PBoC), for the second time in a month, showing the bank bought 19 tons of bullion in July to take holdings to 1,677 tons. A month ago, China ended six years of silence on its gold hoard, announcing a 57% rise in assets since 2009. Although the figures are not thought to reveal the full picture of Beijing’s official gold holdings, greater transparency on reserve data is part of a Chinese bid to conform to international statistical norms and buttress its campaign for reserve-currency status. By becoming the fifth currency in the SDR — after the dollar BUXX, -0.14% , euro EURUSD, +0.1589% , sterling USDGBP, -0.2065% and yen USDJPY, +0.15% — the yuan would formally join an elite reserve-currency club, reinforcing Beijing’s global financial and monetary clout. Many observers appear to have failed to realize that, if the yuan is to become a reserve currency, then Beijing will have no choice but progressively to relinquish the peg with the dollar that started already to loosen in 2005. Since then the Chinese currency has appreciated by 30% against the dollar, against last week’s fall of 3%. Rather than precluding growth as a reserve currency, fluctuations in foreign-exchange rates appear to accompany this development. In the initial phases of the Deutsche mark’s participation in what has become a multicurrency reserve system, the dollar roughly doubled in value against the West German currency between 1980 and 1985, and then depreciated by 50% in the next two years, registering similar oscillations against the yen. In a further sign of a coordinated IMF-Beijing approach, the Fund has released findings of a new survey showing that 38 unnamed central banks and monetary authorities held yuan assets in 2014, making up 1.1% of global holdings of “official assets” (a wider definition than “reserve assets”), against 27 holders (0.7% of the total) in 2013. The figures understate the total number of yuan holders, since not all of the IMF’s 188 members responded to the survey. The IMF data for the first time enshrine the yuan as the seventh-most important world official asset after the dollar (63.7% of the total), euro (21%), sterling (4.1%), yen (3.4%), Australian dollar (2.1%) and Canadian dollar (2%). The figures show that, of the survey respondents, 127 central banks own dollars, 109 hold sterling, 108 have euros and 88 have yen. Last week’s yuan softening against a generally strong dollar will help alleviate pressure on Chinese exporters after a 14% real (inflation-adjusted) increase in the yuan’s trade-weighted value over the past 12 months. Chinese officials have defended last week’s shift in pegging arrangements as a one-off move rather than as a prelude to a full-scale devaluation campaign against the U.S. and other large economies. On the basis that China is trying to become a “good citizen” in the international monetary arena, these protestations appear genuine. On Monday, the PBoC set the exchange rate at 6.3969 renminbi per dollar, up slightly from Friday’s 6.3975. A more flexible Chinese exchange-rate policy reflects an oft-stated IMF requirement for China to increase the effectiveness of its monetary policies in the face of sizable and growing capital flows with the rest of the world. On Friday, the IMF revealed that its economists requested in May that China move further towards a genuinely floating exchange rate including “‘steps over the next few months … further widening … the band and changes to how the central parity is set” – effectively foreshadowing the PBoC’s action on Aug. 11. China has pledged it will use its $3.65 trillion foreign-exchange reserves to quell any disorderly currency fall but has warned investors to expect “two-way volatility” in yuan trading. In a statement on Sunday, Ma Jun, the PBoC’s chief economist, said the Chinese government had “no intention or need to participate in a ‘currency war’” — lowering expectations of any further strong yuan decline in coming weeks.

DOWNLOAD

David Marsh: China's Switch on Yuan Reinforces Bid to Join Elite Currency Club

related articles

tags