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china’s emergence on the international commercial stage has not gone unnoticed， most notably in the changing economic realities of international finance. with the yuan increasingly used in trade and capital market transactions， Hannah Edinger， director at Frontier Advisory， looks at the international Monetary Fund’s assessment of the chinese currency and its inclusion as a reserve currency. her thoughts follow：
IN October 2013， the yuan reportedly overtook the euro to become the most used currency in trade finance. It is also the fifth most used currency in global transactions. China’s central bank， the People’s Bank of China （PBC）， maintains currency swap arrangements with about 30 countries or regions. More than 60 central banks already hold yuan assets as part of their reserve pools. This， in particular， is set to unlock opportunities for other nations to attract manufacturing investment through both offshoring and re-shoring and could have far-reaching implications for the African region.
These changing economic realities have however not yet reflected in what are still largely “Western” institutions governing international finance. It then comes as little surprise that Chinese Premier Li Keqiang as well as the PBC have requested the International Monetary Fund （IMF） to recommend the yuan as a reserve currency.
In 2010， the five-yearly review of the IMF Special Drawing Rights （SDR） basket rejected the inclusion of the yuan into this international reserve asset made up of the dollar， euro， pound and the yen on the ground of the currency not meeting the “freely usable”clause. So despite drastic changes in the make-up of the world economy， the SDR basket has stayed unaltered.
In April， as part of its SDR review， the IMF said it is conducting a comprehensive assessment of the Chinese currency and its inclusion as a reserve currency. Supporting this is China steadily appreciating its currency， adopting IMF-endorsed accounting standards， and greater yet gradual liberalization of its capital account and interest rates， as well as stronger financial regulation and supervision. This also includes steps taken by the government to promote the use of the yuan in international transactions.
Already， China has shown that it is a force to reckon with， spearheading the establishment of two infrastructure and development-orientated banks， namely the Asian Infrastructure Investment Bank and the New Devel- opment Bank， the latter with its BRICS（Brazil， Russia， India， China and South Africa） compatriots. The Asian powerhouse， as the largest economy in the BRICS grouping， will dominate the BRICS Contingent Reserve Arrangement （41 percent） - a key move in the internationalization of the yuan. There are various benefits of the“people’s currency” being awarded reserve currency status. For the IMF and the international community at large， it would grant a degree of greater monetary stability. The SDR basket would provide a better representation of the structure of world trade. More widespread use of the yuan as a currency for trade will reduce foreign exchange losses when trading with China. For the United States， arguably， better representation of global realities and China’s interest to influence and help rebalance the system would ultimately also serve the world’s largest economy in promoting what is still very much a United States-based and led system.
For China， this would accelerate the opening up of its financial markets and pave the way for easier access to and cheaper capital. This would however come at the expense of its manufacturing sector， as greater demand for its currency （as central banks demand more yuan） under a more flexible exchange rate regime could see the yuan’s price competitiveness erode， making Chinese exports less competitive.
This is not a disadvantage per se， given China’s economic rebalancing and shift of its growth model. This will help propel China’s move from being the lowcost manufacturing powerhouse and exporter of the world to becoming a leading investor with greater expansion of “China Inc.”abroad， and ultimately， a leading global consumer.
China is Africa’s largest trade， investment and financing partner， and has arguably elevated both the international importance and attractiveness of what is still the least developed region in the world in global commerce. Beyond reduced transaction costs and improving efficiencies when doing business between China and Africa， which are set to spur trade and investment for the region， this could further contribute toward building momentum for Africa’s own economic diversification and structural transformation. CA
IN October 2013， the yuan reportedly overtook the euro to become the most used currency in trade finance. It is also the fifth most used currency in global transactions. China’s central bank， the People’s Bank of China （PBC）， maintains currency swap arrangements with about 30 countries or regions. More than 60 central banks already hold yuan assets as part of their reserve pools. This， in particular， is set to unlock opportunities for other nations to attract manufacturing investment through both offshoring and re-shoring and could have far-reaching implications for the African region.
These changing economic realities have however not yet reflected in what are still largely “Western” institutions governing international finance. It then comes as little surprise that Chinese Premier Li Keqiang as well as the PBC have requested the International Monetary Fund （IMF） to recommend the yuan as a reserve currency.
In 2010， the five-yearly review of the IMF Special Drawing Rights （SDR） basket rejected the inclusion of the yuan into this international reserve asset made up of the dollar， euro， pound and the yen on the ground of the currency not meeting the “freely usable”clause. So despite drastic changes in the make-up of the world economy， the SDR basket has stayed unaltered.
In April， as part of its SDR review， the IMF said it is conducting a comprehensive assessment of the Chinese currency and its inclusion as a reserve currency. Supporting this is China steadily appreciating its currency， adopting IMF-endorsed accounting standards， and greater yet gradual liberalization of its capital account and interest rates， as well as stronger financial regulation and supervision. This also includes steps taken by the government to promote the use of the yuan in international transactions.
Already， China has shown that it is a force to reckon with， spearheading the establishment of two infrastructure and development-orientated banks， namely the Asian Infrastructure Investment Bank and the New Devel- opment Bank， the latter with its BRICS（Brazil， Russia， India， China and South Africa） compatriots. The Asian powerhouse， as the largest economy in the BRICS grouping， will dominate the BRICS Contingent Reserve Arrangement （41 percent） - a key move in the internationalization of the yuan. There are various benefits of the“people’s currency” being awarded reserve currency status. For the IMF and the international community at large， it would grant a degree of greater monetary stability. The SDR basket would provide a better representation of the structure of world trade. More widespread use of the yuan as a currency for trade will reduce foreign exchange losses when trading with China. For the United States， arguably， better representation of global realities and China’s interest to influence and help rebalance the system would ultimately also serve the world’s largest economy in promoting what is still very much a United States-based and led system.
For China， this would accelerate the opening up of its financial markets and pave the way for easier access to and cheaper capital. This would however come at the expense of its manufacturing sector， as greater demand for its currency （as central banks demand more yuan） under a more flexible exchange rate regime could see the yuan’s price competitiveness erode， making Chinese exports less competitive.
This is not a disadvantage per se， given China’s economic rebalancing and shift of its growth model. This will help propel China’s move from being the lowcost manufacturing powerhouse and exporter of the world to becoming a leading investor with greater expansion of “China Inc.”abroad， and ultimately， a leading global consumer.
China is Africa’s largest trade， investment and financing partner， and has arguably elevated both the international importance and attractiveness of what is still the least developed region in the world in global commerce. Beyond reduced transaction costs and improving efficiencies when doing business between China and Africa， which are set to spur trade and investment for the region， this could further contribute toward building momentum for Africa’s own economic diversification and structural transformation. CA