The Market Monitor Minding the Nation's Business
By Jerry Maglunog
Yuan, the Chinese currency, is set to become a dominant tradable currency in the world like the US dollar and Philippine banks must be ready for this eventuality, Bankers’ Association of the Philippines (BAP) President Lorenzo Tan said.
Tan said eight local banks are already offering yuan deposits. The eight, led by Banco de Oro and Rizal Commercial Banking Corp., are considered the pioneer in such deposit offer.
Tan, president and chief executive officer of RCBC, also said the emergence of yuan is a reminder of China’s rise in the global trade and commerce.
“That’s why from the beginning, we already offered yuan deposits,” said Reynaldo Maclang, president and chief executive officer of Philippine National Bank, said.
A source in the financial market said that the emergence of the currency as one of the most dominant is just one of the financial assaults of China that began with the creation of the bank that will rival World Bank and Asian Development Bank.
Ailene Navarez, a manager at one lighting company, said their clients in Hong Kong have already told them to maintain at least two yuan accounts if they want to continue to become one of the licensed dealers of lighting products.
The strength of the yuan is now so visible that the International Monetary Fund will decide in two months whether or not to include the yuan to be one of the units of special drawing rights (SDR), supplementary foreign-exchange reserve assets defined and maintained by the IMF.
The source added that when using its own currency, China will fear no one that it is being spied for the billions of yuan it spent. He said now that China is building many facilities outside its territory, it is just natural for the new economic superpower to have its own currency.
“Because if you use dollar in purchasing, it will be viewed in New York where the money will be spent. If you’re using euro, it will be seen in Paris where the money is going. In yuan, China can create its own network and the West has no idea where the money will be spent,” the source said.
An editorial in one leading newspaper in the US has this anecdote: In what would be a huge milestone in China’s emergence as a major world financial power, the IMF looks likely to adopt the country’s currency into the basket that makes up its global forex benchmark.
Strategists at Bank of America Merrill Lynch, writing in a note, believe the IMF will vote this October to include the yuan as one of the units that make up the IMF’s SDR, a sort of meta-currency used in Fund’s transactions.
This might not seem like a big deal, but Merrill Lynch says it is. By joining the elite club, there are only four currencies in the basket right now, the US dollar, the euro, the British pound and the yen.
It would legitimize its use as a reserve currency, possibly reducing China’s cost of foreign borrowing and offering an “extra degree of freedom in financing future current-account deficits, the strategists said.
In fact, given that the yuan already enjoys significant use as a reserve currency, its weighting in the SDR system would likely be higher than that of the pound and yen, they said.
According to Merrill Lynch estimates, central banks around the world currently hold a total of more than $80 billion in Chinese government bonds, which would make it the seventh largest reserve currency on earth.
China, and in particular long-serving People’s Bank of China Gov. Zhou Xiaochuan, has for sometime now been pushing for inclusion in the SDR, which is reweighted just once every five years.
They didn’t make the last cut in 2010, as the IMF deemed China’s current account hadn’t opened enough to meet the “freely usable” criteria required of SDR currencies.
But Merrill Lynch sees the Fund as likely to give the go-ahead at this year’s review. There’s now a lively offshore market for the yuan (also known as the “renminbi” or “people’s currency”), for instance.
Also, the strategists think the US is unlikely to block the move, as it wants China more engaged in international institutions where Washington has wide sway, and in any case, it wouldn’t want to strain relations with Beijing.
Although obtaining such a high status in the foreign-exchange world would have deep symbolic value for China, the actual effect on the value of the yuan is a little harder to predict.