Yuan has made its entrance to the International Monetary Fund

In the framework of the G-20 group reunion it was exposed as the main theme of the Chinese economy and the decline that has been taking this action.

As such it was emphasized that the international support should have with the Chinese economy to have a greater role in the world. This would allow to the economy of China to be more open to the world and help counter the imbalances in the international trade, as the country of China accounts is for almost 10.6% of world exports, it is twice as the exports from the country of Japan and the United Kingdom; but in turns out that its currency the Yuan at the end of the year of 2014 represented less than 1.1% of the international reserves held by the central banks.

The G-20 group reunion was the ideal scenario for recognizing the Yuan currency as part of a special drawing right (SDR) of the International Monetary Fund, just like the Euro, the British Pound and the Dollar. Finally the United States of America is in favor and even Christine Lagarde publicly stated its position in favor, it is possibly for the Yuan to change and it will take effect in October of 2016. From that financing operations that the Internationalyuan 2 Monetary Fund makes, about 180 countries using SDRs is also included the Yuan. While it is true that since the Yuan began to have changes, that’s when comparing the report of the International Monetary Fund, which recommended including the Yuan to filter.

They have suggested various operations of the Yuan as a reserve currency; including an estimated part of their assessment may come from a currency equivalent to 500.000 millions of dollars to build up the reserves by several of the central banks and as part of a worldwide demand in the financial assets. Other estimates suggest a smaller amount to 40.000 million dollars or 100.000 million dollars.

The exact currency movement is not yet known; because if it becomes context of a strong dollar due to higher interest rates from the Federal Reserve could weaken the Yuan strengthened once in the year of 2016. Similar, is the idea to make the Yuan freely a convertible currency so it can make the payments and the international transactions. Much several and diverse risks can occur, or can be converted into a stability mechanism and a diversification of the financial volatility.

However, if the Yuan is at last included and becomes a reserve currency, not only wins the country of China, decreasing the financing costs and the transactions and may increase the connection with the global currency markets, increasing the inflation in the markets through the monetary policy. This would make it to face challenges, but its success will depend on its entry to the basket.

That’s why the country of China needs to make some changes before open its capital account, among these changes is to create a deep liquidity in the financial market to minimize the risk of the exposure rate that changes to the holders, that is, the people can get their money whenever they want. Another important and relevant change to note is that the country of China must be really sure to have a strong economy to manage the entry and the exit of capital. These observations are very important as claim the president of the United States Federal Reserve, Mr. Ben S. Bernanke, as it is recognized that the country of China is still lacking financial market depth and liquidity, which is still well behind the United States and Europe in terms of hard efficiency and clear transparency.

yuanThe reasons why the country of China is facing various challenges, including some that can be cited were extracted from the Intelligence Unit of The Economist, among these challenges are:

  • The Lack of understanding about how to conduct transactions in Yuan for use in the cross-border transactions.
  • The Lack of liquidity for the global Yuan.
  • The relocationof theregionaltreasuryoperationsafter the liberalizationshould be delegated with more power to the decision makerson the continent.
  • The liberalization of the capital accountsandthe internationalization of theYuanwill bringpotentially volatilecross-borderflowsofcapital; this may causea rapid appreciationof the currency,which could affectthe country’s competitiveness.

The entrance of the Yuan to the International Monetary Fund has generated controversy in different organisms. For example is noted in Foreign Policy magazine that the Yuan is not relevant to enter the basket of currencies of the IMF currency. One argument focuses on that for the Yuan from the International Monetary Fund, the country of China must first offer its currency to the rest of the world, either incurring in trade deficits, or making major capital investments in the world.

In that sense the country of China has done nothing of the above, if not to the contrary, the economy has been developing, and what it has been done is that China is a country that attracts more capital flows than is invested abroad. Besides this, Beijing has spent several years recording huge trade of surpluses that allow them to have the largest currency reserve in the world. What has made the country of China has been importing billions of currency from other countries, the Chinese stores in its Central Bank as a reserve, whereas the Chinese investments over the world have been a few.

That way, it can be summarized according to the above findings, that if the Yuan finally enters the basket of currencies of the IMF its scope is not something positive, as it is considered that the currency is entering the basket from the International Monetary Fund, more by the political pressure and the technical aspects to meet the International Monetary Fund established a currency to label as “international reserves”. This can lead in the future for other countries to do the same. No doubt that the Yuan had to go at some point in that basket, but perhaps this was not the most appropriate time.

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