1、Chinese Yuan Steps up to Global StageContinue to Liberalise Chinas Economy Chinas entry to a global currency elite represents another highly symbolic step along the way to its inclusion as a full partner in a global financial and trading system. Despite legitimate concerns about Chinas faltering com
2、mitment to financial sector reforms， the International Monetary Funds decision to include the Chinese yuan， or renminbi， in a basket of reserve currencies， known as Special Drawing Rights， should be welcomed. This is a further sign of Beijing being accorded the status of responsible stakeholder in a
3、 globalised world. However， the IMF will need to be vigilant to make sure China lives up to its undertakings to continue to liberalise its economy. The IMF decision is both an overdue recognition of Chinas importance in the world trading system， and an encouragement to reformers in the Chinese leade
4、rship to keep pressing ahead with a process of liberalisation. Pointedly， IMF chief Christine Lagarde said the “renminbis inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented.” China is edging towards full currency convertibility in
5、 line with the practices of its trading partners. The Peoples Bank of Chinas management of yuan dollar rates remains a clumsy work in progress， leaving Beijing open to criticism it is a currency manipulator to improve Chinese exporterscompetitiveness. In some respects IMF decision might be regarded
6、as a consolation prize for China and other important emerging market economies whose push for increased IMF voting rights in line with their economic significance Chinas Asian International Infrastructure Bank （AIIB） initiative is widely regarded as a response to continued US-dominance of internatio
7、nal lending institutions ?C the IMF and World Bank. The Yuan Would not Become a Reserve Currency until September 2016 While the immediate effects of the yuans inclusion in the SDR basket will not make much difference in world currency markets ?C the yuan would not become a reserve currency until Sep
8、tember 2016 ?C what cannot be overstated is its broader significance. The decision ranks symbolically with Chinas admission to the World Trade Organisation in 2001. What will happen in the third quarter of next year is the yuan would join the US dollar， the euro， the British pound and the Japanese y
9、en as contributors to the SDR basket. This is a weighted basket of currencies used by the IMF to price its emergency loans. Under the new arrangement， the US dollars weighting will remain broadly unchanged at 41.73 per cent， the euro 37.4 per cent， the yuan 10.92 per cent， the yen， 8.33 per cent and
10、 sterling 8.09 per cent. As representative of the worlds second largest ?C and fast growing ?C economy China could be expected to assume a bigger weighting in the years ahead. What will be scrutinised by currency traders in the immediate aftermath of the IMF decision will be the extent to which the
11、yuan moves in anticipation of being added to the IMF basket of reserve currencies in 2016. Traders have mixed perspectives on likely yuan movements between those who anticipate an appreciation in its value against the dollar and those who expect the currency to drift down during the next twelve mont
12、hs in response to a slowing economy. A consensus view is that the yuan will depreciate by anything between 3-10 per cent ， an IMF decision on SDRs notwithstanding. China analysts are forecasting not much more than $US42 billion in reserve assets being rebalanced in to the yuan as a consequence of th
13、e SDR decision. More significant is the further encouragement the IMF move will give to central banks and other such institutions to access Chinas bond markets that have hitherto been treated warily by sovereign institutions. Among the IMFs various motivations - apart from recognition that it made n
14、o sense to continue to exclude an economic powerhouse from those contributing to a basket of reserve currencies - is the hope that such a step will add to pressures on Chinas central bank， the Peoples Bank of China， to become less opaque. Lack of transparency in the PBOCs decision making processes，
15、is a significant， and ongoing， concern. From an Australian perspective the IMF decision may have negative consequences if the yuan drifts significantly lower against the dollar， thus increasing the competitiveness of Chinese commodity producers. The point is that given uncertainty in currency market
16、s anyway ahead of a Federal Reserve interest rate decision later this month it is virtually impossible to predict where we will be a year from now when the IMFs SDR decision comes into effect. Whats next for China？ China has entered the big league with its currencys inclusion into the International
17、Monetary Fund （IMF） s basket of reserve currencies， but analysts are already looking to see what the next move is as the country continues to reform and open its financial markets. Experts interviewed expect more reforms like those that led to the IMFs decision， including allowing the yuans value to
18、 be determined to a greater extent by the market， to push the currency onto the global stage. The Chinese yuan was added as the fifth currency to the IMFs Special Drawing Right （SDR） basket on November 30， marking a historic moment in Chinas journey toward globalizing its currency. The decision also
19、 underscores the countrys rising financial and economic heft. Yi Gang， Vice Governor of the Peoples Bank of China（PBOC） ， the countrys central bank， said the yuans inclusion in the SDR is just the beginning and China has a long way to go before it closes the gap with more mature financial markets. “
20、Joining the SDR means the world will expect more from China in its financial and economic reforms. Therefore， China should learn from developed countries as well as other developing countries and emerging markets in a modest manner， ”Yi said during a press briefing on December 1. “China will press a
21、head with its reforms and opening up so as to consolidate its status as a reserve currency in the SDR basket.” SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries official reserves. SDRs are allocated to IMF members from time to time， based on each cou
22、ntrys quota in the IMF. The composition of the SDR basket is reviewed every five years. As of September 2015， a total of 204.1 billion SDRs（about $280 billion） have been allocated， most recently in 2009 when 182.6 billion SDRs were allocated， according to the IMF data. The PBOC said it welcomes the
23、IMF decision， calling it an acknowledgement of Chinas economic development， reform and opening up. “The inclusion of the yuan in the SDR basket will increase the representativeness and attractiveness of the SDR， and help improve the current international monetary system， which will benefit both Chin
24、a and the rest of the world， ” it said in a statement following the IMF announcement. “It also means that the international community expects China to play a bigger role in the international economic and financial sys-tem.” The inclusion will go into effect on October 1， 2016， with the yuan joining
25、the U.S. dollar， euro， Japanese yen and British pound. In an announcement following a vote by the IMFs executive board， Managing Director Christine Lagarde said the yuan meets all existing criteria and is determined to be a freely usable currency. “The continuation and deepening of these efforts wil
26、l bring about a more robust international monetary and financial system， which in turn will support the growth and stability of China and the global economy， ” Lagarde said in her announcement. She continued， calling the decision “an important milestone in the integration of the Chinese economy into
27、 the global financial system” and an important validation of Chinas efforts to reform its monetary and financial systems. The Worlds Fourth most-used Payments Currency Indeed， the yuan has passed multiple milestones over the past year. It is now the worlds fourth most-used payments currency， passing
28、 the Japanese yen. In August， the yuan ac- counted for 2.79 percent of global payments in terms of value， according to data from the Society for Worldwide Interbank Financial Telecommunication. The currencys elevation to the club of elite reserve currencies is the icing on the cake， so to speak， and
29、 represents a historic moment for China akin to when the country was included in the World Trade Organization in 2001， said Guo Tianyong， a finance professor with Beijing-based Central University of Finance and Economics. “It means the international community has recognized the yuans capability in s
30、houldering the responsibilities of a global currency， ” Xu Hongcai， Director of the Economic Research Department at China Center for International Economic Exchange （CCIEE） ， told Beijing Review . “In the meantime， it will help facilitate further globalization of the yuan.” Xu said the inclusion mar
31、ks an increase of the yuans international credit， which will pave the way for broader use of the currency in global trade and finance and help lower the financial costs and exchange rate risks for those who use the currency. A report from the Shanghai-based Haitong Securities Co. Ltd. forecasted tha
32、t the yuans exchange rate will become more flexible in the future， predicting that the trading band will be expanded to 3 percent or more as the PBOC further loosens its grip over the currency following the IMFs decision. The PBOC changed the way the yuans daily trading band is calculated on March 1
33、7， 2014， by setting a daily midpoint for the yuan that the currency can then be traded within a 2-percent range. The central bank previously controlled the midpoint and allowed the currency to fluctuate just 1 percent of the midpoint. In August， China changed its central parity system to better refl
34、ect market development in the exchange rate between the Chinese yuan against the U.S. dollar， another step toward market forces determining the value of the currency. The central bank has made other large strides in recent years to reform the financial markets and open its capital account. Its those
35、 reforms that have led to Chinas economic progress and the IMFs decision to include the yuan in the currency basket， said Cao Fengqi， Director of the Research Center for Finance and Securities at Peking University. He has no doubt that the yuan will become a global currency. “Its only a matter of ti
36、me， ” Cao said. Xu warned the government cannot be complacent now that the yuan has been included， saying it still has a long way to go before it will be considered a global currency. China will face fresh pressure after the inclusion， as the government will need to pay more attention to fluctuation
37、s in financial markets both at home and abroad， said Xu. “I think the opening up of the capital account should be pushed forward in a steady manner. Massive inflow and outflow of capital could be quite normal in the future， ” he said. The government should have additional supervision over speculativ
38、e capital flows that can lead to market instability， which he says could include a Tobin tax-a tax on crossborder currency transaction. Reforms are expected to continue. The Haitong Securities report predicts that three major reforms are coming down the pipeline following the IMFs decision： formation mechanism of the yuan exchange rate， management of international capital flow and further opening up of the domestic bond market.
