The International
Monetary Fund will hold an informal board meeting this month to discuss
potential changes to its Special Drawing Rights reserve-currency basket,
with a formal decision set for later this year. IMF Managing Director
Christine Lagarde recently said it is a question of when, not if,
China’s yuan will be added. Here are five things to know about how
global investors will be affected by the yuan becoming a globally usable
currency.
#1: Use of the yuan is increasing
The yuan ranked fifth in world payments as of January, according to
interbank network operator Swift. In forex trading, it ranked ninth with
a 2% share in 2013, the latest year for which figures are available,
according to the Bank for International Settlement. International use is
still constrained by restrictions on convertibility of the capital
account, because foreign investors lack a way to make their yuan work.
#2: China really wants the yuan to be an international currency
Beijing’s stated goal is to have a currency that matches China’s
economic clout by 2020. Pride aside, it wants more foreigners buying
shares of state-owned companies and local government debt as it repairs
their balance sheets. It also wants to invest more overseas as growth at
home slows. Authorities have sped up the financial overhaul in the past
year, creating deposit insurance and expanding the interbank market.
#3: Yuan holdings by institutions outside of China is on the rise
More than 60 global banks and sovereign-wealth funds hold
yuan-denominated assets worth $70 billion to $120 billion, or 0.6% to 1%
of current world reserves, according to Standard Chartered. Being
included in the SDR would help sentiment. Analysts at China
International Capital Corp., a Chinese investment bank, forecast the
yuan’s share of the world’s reserve holdings will climb to 3.7% this
year and 7.8% by 2020, if the Chinese economy continues to grow at a 7%
annually.
#4: No one can agree on whether the yuan is fairly valued.
Since January 2014, the yuan has weakened 2.5% against the dollar but
strengthened 20% against the euro and 11% against the yen. Bank of
International Settlements data suggests the yuan is the most overvalued
of the world’s major currencies because of China’s weakened trade
position. But investors expect increased inflows into China’s capital
markets to drive increased demand for the currency.
#5: Chinese investors will likely hold onto their yuan
As China liberalizes its capital
account for domestic investors, capital outflows should increase.
Standard Chartered analysts expect any increase in outflows to be more
than offset by an increase in capital inflows. As long as the exchange
rate remains broadly steady, domestic investors are likely to have
limited incentive to diversify into foreign assets.
The Wall Street Journal
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