{"id":79659,"date":"2015-10-16T11:19:41","date_gmt":"2015-10-16T15:19:41","guid":{"rendered":"http:\/\/countingpips.com\/?p=79659"},"modified":"2015-10-16T08:17:19","modified_gmt":"2015-10-16T12:17:19","slug":"yuan-set-to-become-a-reserve-currency","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/10\/yuan-set-to-become-a-reserve-currency\/","title":{"rendered":"Yuan Set to Become a \u201cReserve Currency?\u201d"},"content":{"rendered":"
October 16, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Is<\/p>\n

By Tim Maverick<\/a>, Senior Correspondent<\/em><\/p>\n

It\u2019s a club reserved for the world\u2019s elite economies\u2026<\/p>\n

Created in 1969, the International Monetary Fund<\/a> Special Drawing Rights (SDRs) is an international reserve asset that\u2019s intended to supplement member countries\u2019 reserves.<\/p>\n

Its value is based on the value of four key currencies \u2013 the U.S. dollar, the euro, the Japanese yen, and the British pound.<\/p>\n

Well, guess who\u2019s pounding on the IMF\u2019s door, looking to gain access to this exclusive club of high rollers?<\/p>

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China.<\/p>\n

Now boasting the world\u2019s second-largest economy, the country wants its yuan currency to be elevated to reserve status.<\/p>\n

What are the odds of this happening?<\/p>\n

Two Tests\u2026 Two Passes<\/h2>\n

Needless to say, the jury is still out. But there are increasing signs that point to the yuan\u2019s admission when the IMF meets in November.<\/p>\n

The IMF has two major criteria for admission into the club:<\/p>\n

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  1. The country must be a major trading nation. Suffice it to say, China easily passes this test.<\/li>\n<\/ol>\n
      \n
    1. The currency must be \u201cfreely usable.\u201d China is passing this test, too. In fact, it recently passed the yen as the world\u2019s fourth most-used payment currency and it\u2019s rapidly closing in on the pound in third place. (The dollar and euro occupy the top two spots, of course.) Over 1,000 banks in 100 countries now use the yuan for payments with China \u2013 up 20% over the past two years. As Chris Knight of Standard Chartered Bank told The Wall Street Journal<\/em>, \u201cTrading [in yuan] was almost nonexistent five years ago but today ranks amongst the most traded currencies globally.\u201d<\/li>\n<\/ol>\n

      In addition to passing these two crucial tests, China is proactively making moves to boost the yuan\u2019s chances of inclusion in the IMF club.<\/p>\n

      For example, it\u2019s expanded the part of its bond market that\u2019s open to foreigners. This is important, given that the so-called \u201cpanda\u201d bond market is expanding. Panda bonds are those issued by foreign companies, but denominated in yuan. The World Bank\u2019s International Finance Corp. says this market could top $50 billion within five years.<\/p>\n

      But there are two other crucial moves that most observers will identify with\u2026<\/p>\n

      First, China is becoming more transparent with its economic statistics, such as the amount of gold reserves and foreign currency reserves it holds.<\/p>\n

      And second, the central bank is making all the right noises about letting \u201cdemand and supply determine the exchange rate\u201d of its currency.<\/p>\n

      The question is: Given its ideological standoff with the West, how will China facilitate more yuan transactions?<\/p>\n

      China Says \u201cNo\u201d to SWIFT<\/h2>\n

      On October 8, China launched its own cross-border yuan payments system. Currently, most global payments are handled by Swift \u2013 the Society for Worldwide Interbank Financial Telecommunication.<\/p>\n

      However, the new and streamlined China International Payments System (CIPS) will replace the current jumbled system for making yuan transactions, which involves using a limited number of offshore banks that recycle the money back into China.<\/p>\n

      CIPS is modeled on the U.S. Clearing House International Payment System, which handles roughly $1.5 trillion in transactions daily.<\/p>\n

      But China has another motive for setting up its own system. Swift is controlled by Western banks. When sanctions threatened to cut off Russia from Swift, one of its top bankers said it was the equivalent of a declaration of war.<\/p>\n

      There also have been numerous allegation that U.S. spy agencies have access to Swift.<\/p>\n

      China wants no part of this, and there\u2019s a strong chance that when CIPS is up and running smoothly, Russia and a number of other countries will dump Swift.<\/p>\n

      The Likely Outcome<\/h2>\n

      I believe China\u2019s currency will<\/em> gain inclusion into the IMF SDRs at the next meeting (although there\u2019s a possibility of the vote being put off until early next year). Why?<\/p>\n

      Well, while there\u2019s no doubt that the United States is against its inclusion, its power is limited. China needs to gain 70% approval from IMF shareholders\u2026 but Uncle Sam only has a voting share of 16.7%, so it can\u2019t block China\u2019s entry.<\/p>\n

      Plus, it\u2019s unlikely that the Americans want to repeat the embarrassment of its opposition to the China-led Asian Infrastructure Investment Bank (AIIB). Despite its opposition, most U.S. allies joined the AIIB anyway.<\/p>\n

      For the Chinese government, getting the yuan into the IMF\u2019s exclusive currency club will be welcome news, given the capital outflows out of its currency this year. In fact, Standard Chartered estimates that IMF inclusion could trigger $1 trillion of inflows<\/em> into the yuan, as central banks add the currency to their reserves.<\/p>\n

      We could just be a few weeks away from a major development in the currency market, as the yuan gets set to enter the stage as a global currency powerhouse.<\/p>\n

      Good investing,<\/p>\n

      Tim Maverick<\/p>\n

      The post Yuan Set to Become a \u201cReserve Currency?\u201d<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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       <\/p>\n","protected":false},"excerpt":{"rendered":"

      By WallStreetDaily.com By Tim Maverick, Senior Correspondent It\u2019s a club reserved for the world\u2019s elite economies\u2026 Created in 1969, the International Monetary Fund Special Drawing Rights (SDRs) is an international reserve asset that\u2019s intended to supplement member countries\u2019 reserves. Its value is based on the value of four key currencies \u2013 the U.S. dollar, the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-79659","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79659","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=79659"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79659\/revisions"}],"predecessor-version":[{"id":79683,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79659\/revisions\/79683"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=79659"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=79659"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=79659"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}