The Market Monitor Minding the Nation's Business
By Jerry Maglunog
China’s yuan, now the world’s sixth most traded currency, is just a matter of months away from becoming the fifth unit in the special drawing rights (SDR), which will make it a currency acceptable for global use.
SDR is a supplementary foreign-exchange reserve asset maintained by the International Monetary Fund (IMF). Its value is based on a basket of key international currencies reviewed by the IMF every five years.
Global bank Standard Chartered said the IMF is now on the final stages of determining the capacity of the yuan when it comes to acceptability before it finally decides to make it the latest unit in SDR.
“Ms. Lagarde is pushing, I guess, because there are many Chinese investors in France,” the bank’s economist for Southeast Asia Jeff Ng said in jest.
Christine Lagarde is the managing director of the IMF who first said that the Chinese currency is now capable to join the basket of currencies.
Many observers said the last five years have been very instrumental for China. This is the season that they sent their astronauts in space, build the Asian Infrastructure Investment Bank, and its stock market cost reached $10 trillion.
Ng said the yuan is set to overtake the Japanese yen to become the fifth most traded currency.
However, only the market can determine when this scenario can happen. “Its exports are amazing, as well as its dollar reserves. Almost all certainties are there. Let it happen,” said Department of Finance chief economist Gil Beltran.
Ng said since he’s not part of the IMF team that determines which currencies can join the SDR, he’s unsure if making the yuan part of the basket will happen this year. “All I know is they will meet this October,” he said.
Benjamin Hung, a leading Chinese currency expert and senior member of Financial Services Development Council, Beijing’s version of the US Treasury Department, evaluated why their currency deserves to be among at IMF’s basket of currencies.
The yuan’s inclusion would cement its rising reserve-currency status and accelerate investment in the currency. To qualify, it must be “freely usable,” although not necessarily “fully convertible.”
The Japanese yen became fully convertible only in 1980—two years after the IMF determined it to be freely usable.
Also, as more than 60 central banks globally have invested in yuan assets—with estimated holdings of over $100 billion—the yuan is already a recognized currency in the eyes of many reserve managers.
According to the People’s Bank of China, the yuan now ranks seventh in reserve holdings globally. Dr. Benjamin Diokno, now Board of Regents president of the Pamantasan ng Lungsod ng Maynila, said only politics can block China’s entry to the IMF basket of currencies.
“The only problem is how to convince Japan and UK if the US economy is in downturn and their currencies must be given lesser weight,” a source said.