WHAT’S NEW WITH THE CHINESE YUAN?

The IMF just announced the inclusion of the Chinese currency, the RMB or Yuan, as the fifth global reserve currency in the IMF’s SDR basket. This move was hailed by many as a sign that the Yuan is finally a major global currency, up there with the US dollar, Euro, British pound and Japanese yen.
The IMF’s case for inclusion centers on China being the world’s third largest exporter, and, it says, the Yuan being “freely usable”. The IMF is able to perform that trick because it defines this as whether a currency is widely used for both global trade payments and currency-exchange trade.

However there are limitations to this statement: the Yuan is not fully convertible into other currencies and it will take some transition time prior to see the RMB becoming freely tradable.
The IMF decision is not surprising but it is more a political statement in support to China current policy and to all the efforts deployed by President XI
IMF Managing Director Christine Lagarde described the decision as "an important milestone in the integration of the Chinese economy into the global financial system." "It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," she said.

But it would be unrealistic to think the RMB will become a true reserve currency in the next few years.

A closer look at the data reveals the Yuan has not truly become widely used. 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.
Those who argue that the Yuan should be eligible as a global reserve currency usually point to the fact that the Yuan is now the fifth-most used currency for international payments, according to SWIFT, a firm that tracks global transactions and interesting enough the center of all this activity is Hong Kong.
“Hong Kong doesn’t exactly reflect overall international demand for the Yuan. 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. Strip away Hong Kong’s influence, and the Yuan claims only about 0.8% of international transactions—less than the Thai baht. “ wrote Gwynn Guilford, a reporter on China economy.

It seems however that besides Hong Kong that represented in 2014 about 70% of Yuan transactions the rest of the world was speculating on the currency. So after the month of August when the Chinese authority took drastic measures to reign in the Yuan the interest decreased.

Now what does this announcement by the IMF mean?

First it is a prestigious endorsement of President XI policy and for his government it is making China a more and more powerful partner on the world map.
But once the prestige wears off in a few months it is not clear the Chinese government will be willing to suffer the unpleasant side effects that come with being a global reserve currency. Finished the time of “playing” the currency war then Yuan will have to be provided to the world in a large , very large quantity.
Is China ready for this?

Interesting enough it is the USA who is pushing for making sure the Yuan land in large quantity into the US Economy. As a demonstration is probably the announcement made yesterday by a group of senior leaders in finance and U.S. industry who announced the formation of The Working Group on U.S. RMB Trading and Clearing, “which will seek to establish the trading and clearing of the Chinese currency renminbi (RMB) in the United States”. Michael R. Bloomberg will serve as the Chair of the Working Group. Mary Schapiro will serve as Vice-Chair, and Thomas J. Donohue, Timothy Geithner and Henry Paulson will Co-Chair, all prominent actors of the past decade US Economic policy.

There is no question that we are entering a new World economic order and even if the RMB is not a reserve yet it will become in the next decade. We can also safely predict that billions/trillions of RMB will flow into the US economy coming from a lot of different horizons not coming only from Hong Kong and from a handful of billionaires. More deals will be made and close in RMB allowing the Chinese middle and upper class to invest directly. This is good news for China, the USA and the rest of the world.

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Libra6 Management is present in Shanghai and invests in Cleantech, Media, Healthcare and Real Estate.
www.libra6management.cn.com
www.libra6management.com

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