Investors Forecast Weaker Yuan, Despite Inclusion in IMF Currency Basket

1 Dec 2015 | Author: | No comments yet »

IMF adds China’s yuan to basket of top currencies.

The International Monetary Fund’s decision to add the Chinese yuan to its basket of elite global currencies gives China a significant boost as it seeks to expand its international influence and rival the global economic order long dominated by the American dollar and economy.World leaders pledged to finish a deal to curb greenhouse gases and overcome a thorny divide on financing as they kicked off international climate talks in Paris against a backdrop of heavy security.†Introductory offers to be billed 4 weekly as per the following – The Australian Digital Subscription $4 per week to be billed as $16 4-weekly; The Australian Digital Subscription + The Weekend Australian (delivered Saturday) $4 per week to be billed as $16 4-weekly; The Australian Digital Subscription + 6 day paper delivery $8 per week to be billed as $32 4-weekly.IMF Managing Director Christine Lagarde said the inclusion was “clearly an important milestone in a journey that had begun months, if not years ago” to a “market-driven” economy in China.

No one expects the Chinese currency to seriously challenge the dollar for years to come; little will change in practical terms right away as a result of the IMF’s action. The IMF’s case for inclusion centers on China being the world’s third largest exporter, and, it says, the yuan being “freely usable” (even though the yuan is not fully convertible into other currencies). But by including the yuan in the basket of currencies that make up its so-called Special Drawing Rights, now comprised of the dollar, euro, pound and yen, the IMF essentially endorsed the yuan as a currency that is stable enough and widely enough accepted to be a safe haven for assets.

The IMF’s able to perform that magic trick because it defines this as whether a currency is widely used for both global trade payments and currency-exchange trade. That’s powerful symbolism and represents a major victory for China, which five years ago lost an effort to be added to the IMF’s reserve-currency basket. In fact, its recent rising popularity more likely reflects speculators’ one-way bet on the yuan’s appreciation against the dollar—an appeal that is now dimming fast. Despite Beijing’s tight control of its financial markets and recent criticisms of its bungled management of a stock market bubble, the IMF decision amounts to a big vote of confidence in China’s reform efforts and provides a boost in prestige for the current government under President Xi Jinping. Two years after Tesla CEO Elon Musk crowdsourced the idea for the Hyperloop, his dream of a ‘fifth mode’ of transportation is quickly and quietly becoming a reality.

Full offer terms and conditions apply – see www.theaustralian.com.au for full details. * Value calculated as at 24/11/15.Offer includes a free Samsung Galaxy Tab A 8” Tablet Model SM-T350NZAAXSA (WiFi Only).Please be aware introductory offers must be purchased before 18 December 2015 for delivery before Christmas Day. And it represents another large step for Beijing as its rise challenges the American-led financial system that has held sway since the end World War II. If you look closer at the data, though, you’ll find that seven-tenths of those supposedly international yuan transactions are done in Hong Kong, says Ho-Fung Hung, professor at Johns Hopkins University and author of The China Boom: Why China Will Not Rule the World.

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Though it has a separate legal and financial system, Hong Kong is also the primary financial channel through which mainland China interacts with the outside world. “Beijing policy is to designate HK as a ‘wholesale’ center of RMB trade,” says Hung, “with HK being a safe offshore financial market for China under tight political control of Beijing.” That makes most of Hong Kong’s yuan transactions an extension of China’s economy, he adds, reflecting “the RMB-ization” of the territory’s economy (RMB is another term for yuan). We will supply your contact details to JB Hi-Fi, who will deliver this tablet only to your registered subscription address and will email you with dispatch details.

However, strip away Hong Kong’s influence, and the yuan claims only about 0.8% of international transactions—less than the Thai baht—notes Hung. Conventional wisdom says a large elderly population undermines an economy, and that Japan’s unprecedented aging condemns the country to a bleak future. As part of its “WSJ 2050: Demographic Destiny” series, The Wall Street Journal explores how entrepreneurs are exploring ways to unleash the potential of Japan’s elderly.

If overseas demand for yuan was genuinely about the rising status of the currency as a unit of trade—and not about betting on how the yuan’s value will change—those offshore yuan deposits shouldn’t have shriveled so abruptly. Offers are available to new customers with an Australian residential address who have not held a digital subscription with The Australian in the 6 months preceding subscribing for this offer. Demand for yuan-denominated assets should also cheapen financing for Chinese companies—an attractive possibility for a country with nearly $17 trillion in corporate debt. Once the prestige wears off, however, it’s not clear the Chinese government will be willing to suffer the unpleasant side effects that come with being a global reserve currency—namely, providing the world with a large amount of yuan. For one, before the yuan becomes a true reserve currency, China must first stop effectively pegging to the dollar, says Derek Scissors, economist at the American Enterprise Institute.

The second step would be allowing the free flow of capital, particularly in and out of China’s bond market, which is currently mostly closed off to foreigner buyers.

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