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Chinese investor's growing clout

By Juwai, 21 April 2015
chinese yuan rmb

Offshore trading is surging in China, and the country has risen to become the second-largest economy in the world.

Its yuan – or renminbi (RMB) – is now the second largest trade financing currency and fifth most widely used transaction currency.1

 

China's next mission

Riding high on the momentum of its Asian Infrastructure Investment Bank (AIIB) success, for which 57 countries and territories have applied to join as prospective founding members, China is pushing forward with its bid for the yuan to be drafted into the International Monetary Fund’s (IMF) basket of reserve currencies a.k.a SDRs.1

 

What are SDRs?

SDR stands for “Special Drawing Rights” – international reserve assets first created in the 1969 to support the Bretton Woods fixed exchange rate system.3

To qualify for inclusion into the SDR basket, the yuan must meet two criteria: 1) Value of the exports of goods and services; 2) How freely usable the currency is.4

The IMF reviews the composition of the SDR basket every five years2, and the next review is due at the end of 2015.

If approved and accepted, the yuan will then become part of the SDR assets of IMF, which include the US dollar, Euro, Japanese yen, and British pound.1

 

China's inclusion to be the world's gain

According to China Premier Li Keqiang, this proposed move is timely and could help maintain global financial stability, as well as further promote the further opening of China’s capital market and financial area.5

To aid the yuan’s success to float freely on international capital markets, China has launched several strategic initiatives.

This includes setting up yuan clearing arrangements with 10 countries and regions1, as well as signing currency swap agreements with 28 central banks1 that amount to a total worth of 3.1 trillion yuan.6

While China’s bid for the inclusion of yuan seems ambiguous for now, IMF head Christine Lagarde has indicated that the yuan may be included into the IMF sometime later this year, which heralds a possible political and economic coup for China.7

Indeed, to be included in the SDR basket will be key game changer for China, as it will be a major push in boosting the wider acceptance of the yuan.

More importantly, it also further validates China’s position as an economic juggernaut in today’s global arena, as well as the growing clout of Chinese purchasing power. Combined with China's relaxation on global outbound investment policies, it's no surprise why so many are fervently working to tap into this market.

 

 
Sources: 1. Shanghai Daily; 2. WSJ; 3. International Monetary Fund (IMF); 4. SCMP; 5. Reuters; 6. Caixin.com; 7. CNBC