The Market Monitor Minding the Nation's Business
By Jerry Maglunog
The inclusion of China’s currency, the renminbi, also called yuan, to the basket of currencies that will determine the value of reserves of every member of the International Monetary Fund (IMF) will bolster trading between the Philippines and China, several observers said.
So far, eight banks are already offering renminbi deposits to Filipino clients as more foreign trading partners are now yuan-denominated, no longer dollar-denominated.
“It will add luster to China and more Filipino firms will need to adjust,” former Budget SAecretary Benjamin Diokno said.
Diokno said that from now until Oct. 16, 2017, the date renminbi will officially begin as the fifth currency in the IMF basket, there will be a series of consultations regarding what weight will be given to the Chinese currency.
“Definitely dollar (weight) will not be lessened,” Diokno added. Even prior to the acceptance of renminbi as fifth unit of special drawing rights (SDR), trading between the Philippines and China has been on the rise.
China has been the Philippines’s second-biggest trading partner, with the Philippines sending electronic microchips and raw materials for dental and medical apparatus. Data from the Chinese Embassy showed that around 80 percent of Philippine merchandise exports to China are electronic parts.
Officials expect a more diversified product mix for trade as the China-Asean free-trade agreement (FTA) takes effect. Under the agreement, duties of more than 7,000 trading items have been reduced to zero since Jan. 1, 2010.
“In the next five years, the growth rate of bilateral trade will double or triple at the trend we are engaging with China,” Amador Pablo, senior trade specialist of the Department of Trade and Industry, said.
The Bangko Sentral ng Pilipinas, meanwhile, expects that more money changers will boost yuan purchase as it is normal for those in this business to accommodate more currencies that comprise the SDR of IMF.
Effective Oct. 16 next year, the basket of currencies that determines members’ reserves at the IMF will be back to five after the deutsche mark and the French franc ceased to exist after both countries started using the euro in 2001. It is presumed that renminbi will be given a 10.92 percent weight.
Prior to its inclusion in the SDR, debates started on whether the renminbi should be allowed to join the elite currencies.
Opposition on the Chinese currencies inclusion to SDR emanates within China itself led by People’s Bank of China governor Zhou Xiaochuan who expressed fears that it will erode the country’s export competitiveness.
Zhou’s concerns are well grounded. With global food prices, a key component in China’s inflation index, having fallen again in previous months, according to the United Nations’ Food and Agriculture Organization, a stronger yuan, by making food imports even cheaper, would only heighten the risk of imported deflation.
There is also the possibility that dollar-denominated energy prices might again prove a source of deflation if a framework agreement between Iran and six world powers ultimately results in an increased supply of Iranian oil and gas, an imported deflationary impulse that would only be exacerbated by a rising yuan.
China’s interests might be best served by a stable or indeed weaker yuan while the IMF is deliberating, particularly as the discussion begins next month but the final decision may only come in January next year. Even the current strength of the yuan has already elicited comment from the Asian Development Bank.
“It is time to ask whether the yuan has become overvalued relative to fundamentals,” said Asian Development Bank chief economist Wei Shang-Jin.
China’s leading broadsheet, China Daily, has said in a recent editorial that the latest boost to their currency follows the launching of their own nuclear program, space technology and nuclear-powered submarines.