Chinese yuan‘s status expected to rise after joining SDR basket

Nov 30, 2015, 08:40 am

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By Hong Soon-do, Beijing correspondent, AsiaToday - China's yuan, also known as renmibi, was largely unwelcome in the international currency markets only a few decades ago. Even in the domestic US dollar black market, the exchange rate was undervalued by about 10%. To give it a hard name, it was the third-class currency that everyone looked down on.

China's yuan. As it is most likely join the International Monetary Fund's basket of reserve currencies, known as Special Drawing Rights (SDR), its status will change to the world reserve currency from the third-class currency./ Source from search engine Baidu

However, the yuan's current status has changed completely. Above all, the black market that had made its status itself miserable almost disappeared. Besides, the yuan is used commonly in Southeast Asia just like dollar. Xinhua News Agency and other state-run Chinese media outlets reported on Sunday that the IMF is widely expected on Monday to say that next year it will add the Yuan to its basket of reserve currencies. As the IMF has already made an official announcement that the yuan satisfies the IMF's criteria for joining the basket of elite currencies, there won't be any unexpected changes. In this case, the yuan is expected to become one of the top five global currencies that include the U.S. dollar, the euro, the British pound and the Japanese yen. In other words, the yuan's status will dramatically change as a global currency.

A Chinese cartoon that shows the yuan being included in the SDR basket./ Source from search engine Baidu

Of course, the impact of the yuan's inclusion in the SDR basket is expected to be insignificant on the international economy and financial markets for now. It's because the SDR represents 2.5% of the world's total currency reserves. Even if the yuan accounts for 15% in the SDR basket, the actual demand for yuan would be merely 0.35% of the world's total currency reserves.

Nevertheless, considerable changes are expected. Most of all, demand for yuan is expected to rise for payment and as reserve currency. International demand is expected to rise for yuan financial products, which will lead to the increasing demand for yuan bonds and equity investments. The yuan's internationalization is likely to be driven sharply. The number of foreign direct investment by the Chinese government and enterprises is also expected to increase. In this case, it's clear that the yuan business would develop rapidly, which will help the Chinese economy.

Moreover, the future global financial system is expected to be inevitably reshuffled into the dollar-euro-yuan reserve currency system. It means that the yuan's power will surpass the power of the yen and the pound. It's not an exaggeration to say that the yuan's age is coming.

#Chinese yuan #SDR basket #reserve currency #IMF 
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