A long road ahead for RMB internationalization
- By Chen Sijin
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E-mail Beijing Review, October 20, 2016
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IMF Managing Director Christine Lagarde delivers a speech on the Chinese yuan's inclusion in the SDR basket at the IMF headquarters in Washington, D.C. on September 30 (XINHUA) |
As of October 1, the yuan—China's currency—has been officially included into the International Monetary Fund's (IMF) Special Drawing Rights (SDR) basket of currencies. This signifies an important milestone in the yuan's goal of internationalization.
The SDR is a synthetic reserve currency created by the IMF in 1969 to supplement its member countries' official reserves. The value of the SDR is based on a basket of major global currencies. SDRs are allocated to IMF members from time to time, based on each country's quota in the IMF. The basket's composition is reviewed every five years.
Ordinarily, most people probably wouldn't pay much attention to the specifics of the SDR, but now, some are concerned about the possibility of exchange rate fluctuations following the yuan's inclusion in the SDR basket. From my point of view, there won't be any sharp fluctuations in the yuan's value, at least not before the currency is fully convertible under the capital account.
Several factors help underpin the yuan's stability, such as China's adoption of a managed floating exchange rate regime which adjusts itself against a basket of currencies. China also has a large commodities trade surplus, and foreign direct investment in China is increasing continuously. Furthermore, the country has a hefty amount of foreign exchange reserves, and its capital flows are becoming more balanced.
As a matter of fact, the exchange rate of the yuan has on the whole been stable after the IMF announced its decision to include the currency into its SDR basket on December 1, 2015.
From an economic point of view, a country is unlikely to have both a strong currency and high housing prices in the long term. Otherwise, it would be able to vastly increase its purchasing power simply by issuing its currency incessantly.
Due to an overheated housing market, mortgages have accounted for more than 60 percent of the total loans taken this year in China so far. If home prices continue to increase at the speed before new purchasing curbs were imposed in early October, there wouldn't be enough loans to go around, even if all bank credit was poured into the housing market. More money should be printed if housing prices continue to soar, but printing more money is likely to destabilize the exchange rate.
An excessive housing price surge will cause damage to the real economy and may even lead to financial crisis. On the other side of the equation, the yuan's internationalization boasts much greater significance than the housing market boom. Take the U.S. dollar for example—the U.S. economy is partly built on the dollar's hegemony. China is bound to opt for exchange rate stability instead of a volatile housing market.
The yuan must embark on a long and arduous journey before it is successful in its goal of becoming an international currency, and joining the SDR is just the first step to accomplishing that.
"The renminbi's inclusion reflects the progress made in reforming China's monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets," said IMF Managing Director Christine Lagarde in a statement.
The yuan's evolution into a global hard currency is much more important than the real estate's role in the broader economy. But making the yuan fully convertible takes time, since a buffer zone to cushion the currency against exterior risks needs to be built.
Anyhow, the currency will realize full convertibility under the capital account eventually, as well as becoming on par with the U.S. dollar and the British pound.
The author is a financial commentator and this is an edited excerpt of an article published in Economic Information Daily
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