EDITORIAL NOTES

Yuan’s globalisation must be complemented by financial reform: The Yomiuri Shimbun

The International Monetary Fund has decided to add the Chinese currency to the Special Drawing Rights (SDR) basket.
The International Monetary Fund has decided to add the Chinese currency to the Special Drawing Rights (SDR) basket.PHOTO: REUTERS

In its editorial on Dec 3, 2015, The Yomiuri Shimbun notes that the yuan's inclusion by the IMF shows that the renminbi is widely used for international trade and calls for further reforms.

The Chinese government must steadily promote financial system reforms, a task needed to ensure the yuan can be “freely usable” for transactions in a manner true to its newly recognised status as an international currency.

The International Monetary Fund has decided to add the Chinese currency, also known as the renminbi, to the Special Drawing Rights (SDR) basket, effective in October next year.

The SDR is a “virtual currency” scheme by which the IMF allocates drawing rights to each member nation in accordance with its capital contribution ratio. 

The SDR basket comprises the dollar, euro, yen and pound. If any IMF member country runs into a currency crisis, it can be allocated necessary funding in the form of key foreign currencies in exchange for its SDR.

China is the world’s largest trading nation. The yuan’s inclusion in the basket appears to show the IMF has favorably acknowledged the fact that the renminbi is widely used for international trade today.

The IMF’s latest decision signifies that the renminbi is to be granted a stamp of approval as an international currency. Greater market confidence in the yuan is expected to encourage the use of the Chinese currency for international settlements and foreign currency reserves. The decision is also likely to benefit Chinese corporations as they will be able to reduce the risk of exchange rate fluctuations.

The People’s Bank of China (PBOC), the central bank, issued a statement on the decision by the IMF: “The decision ... is an acknowledgement of China’s economic development, reform and opening up ... which will benefit both China and the rest of the world.”

However, doubts persist regarding the yuan’s inclusion in the SDR basket. Through intervention by the PBOC, the renminbi’s foreign exchange rate is controlled so it will remain within a certain range of fluctuation, which means that the exchange quotation is not solely determined by a supply-demand relationship in the money market.

There are still restrictions on renminbi transactions by foreign investors in China’s domestic market. We feel the current state of affairs surrounding the yuan is nowhere near being “freely usable” for international trading, a requirement cited as part of the IMF’s criteria for SDR basket inclusion.

China’s abrupt devaluation of its currency was one of the factors behind the worldwide simultaneous drop in stock prices in August. A wider use of the yuan could further increase such risks.

In commenting on the latest decision, IMF Managing Director Christine Lagarde emphasized, “[The yuan’s inclusion in the SDR basket] is an important milestone in the integration of the Chinese economy into the global financial system.”

Her remark can probably be viewed as an attempt to urge the Chinese government to reform its foreign exchange and capital transaction systems in exchange for the 
IMF’s decision to acknowledge the renminbi as an international currency.

It should not be forgotten that China’s self-righteous policy management has continued to disturb the international financial market. The Chinese government needs to improve the transparency of its economic policies, a task essential for enabling nations around the world to use the yuan without worry.

There are concerns that progress in the globalization of the renminbi could lead to a relative decline in the yen’s presence in the international market. 

To increase the attractiveness of the yen, efforts to reinvigorate the Japanese economy must be stepped up. The government’s growth strategy should be adequately promoted to expand foreign investment in our nation.

The Yomiuri Shimbun is a member of The Straits Times media partner Asia News Network, a grouping of 22 newspapers seeking to promote coverage of Asian affairs.