Yuan's SDR inclusion could do harm to China

by **Proven** Sun 03 May 2015, 6:45 pm

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Post n°1

Yuan's SDR inclusion could do harm to China

by Proven Sun 03 May 2015, 6:45 pm

Yuan's SDR inclusion could do harm to China

For the yuan to be accepted as a reserve currency, the country will lose export competitiveness and risk falling into deflation as unit strengthens

Beijing may be pressing for the yuan to be included in the special drawing rights, the International Monetary Fund's unit of account, but that would also trigger major demand for the currency that could have adverse impact on China's other economic interests.

The country's export competitiveness would be eroded if the yuan was to appreciate anew against the currencies of other major economies. This could be particularly problematic when ultra-accommodative monetary policy elsewhere, such as in the euro zone and Japan, has already seen a marked appreciation of the yuan against the euro and the yen.

A stronger yuan also lowers China's imports bill and would only add to the central bank's concerns about the risk of deflation in the country.

"Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," said People's Bank of China governor Zhou Xiaochuan on March 29.

Zhou's concerns are well grounded. With global food prices, a key component in China's inflation index, having fallen again last month, according to the United Nations' Food and Agriculture Organisation, a stronger yuan, by making food imports even cheaper, would only heighten the risk of imported deflation.

There is also the possibility that dollar-denominated energy prices might again prove a source of deflation if a framework agreement between Iran and six world powers ultimately results in an increased supply of Iranian oil and gas, an imported deflationary impulse that would only be exacerbated by a rising yuan.

China's interests might be best served by a stable or indeed weaker yuan while the IMF is deliberating, particularly as the discussion begins next month but the final decision may only come in January next year. Even the current strength of the yuan has already elicited comment from the Asian Development Bank.

"It is time to ask whether the [yuan] has become overvalued relative to fundamentals," said ADB chief economist Wei Shang-Jin on March 24 as the bank unveiled its annual economic overview of the region.

Yet an even stronger yuan seems the unavoidable consequence of its inclusion as a constituent part of the SDR, joining the US dollar, the euro, the British pound and the yen.

"The official recognition of the [yuan's] reserve-currency status would spur [yuan] investment by central banks all over the world," Standard Chartered's Jukka Pihlman said in December.
The day-to-day yield from holding the [yuan] is much better than the derisory or indeed negative returns on offer from other units

"Moreover, the sheer magnitude of Chinese exports - China is the world's largest exporter of goods and services - would send the [yuan] straight past the yen and the pound to make it the third-highest-weighted currency in the SDR."

In truth, yuan inclusion in the SDR basket is seemingly only a matter of time.

"It's not a question of if, it's a question of when," said IMF managing director Christine Lagarde when asked about the SDR issue.

Of course, that might not necessarily mean inclusion in the next 12 months.

While European countries such as Britain, Germany, France and Italy seem more favourable to the idea, others such as Japan and the United States seem less enamoured.

However, foreign-exchange traders think ahead and might be attracted to the view that if inclusion in the SDR would mean the yuan would subsequently appreciate in value, it would be best to initiate the trade before the decision.

Dealers looking to buy the yuan will also know the day-to-day yield from holding the currency is much better than the derisory or indeed negative returns on offer from other units such as the euro, the yen and the dollar.

Nevertheless, it is surely not in China's immediate interests to see the yuan firm in advance of an IMF decision on its inclusion in the SDR, knowing the move would then trigger yet more demand for it. Its best interests, in the interim, might be best served by leaning against any such speculative demand for the yuan.

That would help preserve the country's export competitiveness, limit currency-related imported deflationary pressures and help ensure that if inclusion in the SDR is secured, the level from which the yuan then begins to strengthen is one with which Beijing is more comfortable.

China sees the inclusion of the yuan in the SDR as being in its interests, but allowing the yuan to rise in value, while that issue is still being debated, may very well not be.

http://www.scmp.com/business/economy/article/1764809/yuans-sdr-inclusion-could-do-harm-china

by **wciappetta** Sun 03 May 2015, 7:44 pm

wciappetta

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Post n°2

Re: Yuan's SDR inclusion could do harm to China

by wciappetta Sun 03 May 2015, 7:44 pm

It's a silly argument. Yuan becomes stronger and in the balance is the political clout verses export ability. I'm sure balance will be struck. Domestic consumption will take up the loss of export ability. It's really part of a maturing economy. As it is now China has outsourced certain production capacity for years now.

Really what China wants is to weaken US influence in the world and diminishing the preeminence of the USD is on the agenda for the obvious reasons; weaker economy in the US weaker military over time, less ability to roam the seven seas. China isn't running deficits for now but that will change when they play the take my paper for real goods game.

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