Demand for yuan set to rise in wake of IMF decision

Its recognition as a global reserve currency could be game-changer for world markets

China has reached an economic milestone with the International Monetary Fund's (IMF) decision yesterday to recognise the yuan as a global reserve currency.

The step is both symbolic and a potential game-changer for global markets, including Singapore, the largest offshore yuan centre outside Hong Kong.

Having the yuan included in the IMF's Special Drawing Rights (SDR) basket is an important sign that the currency is seen as a safe asset but the move could have practical benefits by boosting demand for it in trade transactions and investment.

The Monetary Authority of Singapore (MAS) welcomed the move and said it was a "momentous and positive development for the international monetary system and reflects the growing use of the yuan as an international payments currency for trade and investment".

MAS said it looked forward to further strengthening cooperation to help foster a resilient and thriving yuan ecosystem in the region.

Singapore businesses can expect it to be far easier to make direct China-Singapore trades in yuan, given that China will likely further expand on the "freely usable" aspect of the currency, said Mr Zhang Weiwu, general manager of Industrial and Commercial Bank of China (Singapore). To be included, the yuan must be widely used to make payments for international transactions and widely traded in the main exchange markets.

Singapore companies can use the yuan in their trade settlements, and financing and investment activities to help save on transaction costs, hedge against exposure in China as well as reduce their forex risk, said Mr Ben Chan, UOB head of yuan solutions.

The IMF move has sparked more interest among local manufacturers like Tai Hua Food Industries. Mr Thomas Pek, Tai Hua's managing director and president of the Singapore Food Manufacturers' Association, said he is considering shifting his firm's invoicing to yuan to facilitate imports as well as sales of his soya sauce products to China.

Mr Pek said: "I won't have to use the US dollar or Singdollar to buy yuan to pay for imports from China. That is very inconvenient.

"We will also be quoting our exports in yuan, as opposed to quoting in Singdollar, which has strengthened against the yuan, making our products less competitive in China."

Mr Sam Vilo, head of Standard Chartered Bank's financial markets Singapore, said he sees further developments, including flexible cross-border investments and remittance, expansion of free trade zones and greater opening up of capital accounts.

But Mr Andrew Colquhoun, senior director, sovereigns, Fitch (Hong Kong), warned: "The speed at which the yuan develops into a global reserve currency will depend on the extent to which central banks and sovereign wealth funds begin to see the currency as a viable store of liquidity and value to rival that of the US dollar."

A version of this article appeared in the print edition of The Straits Times on December 02, 2015, with the headline 'Demand for yuan set to rise in wake of IMF decision'. Print Edition | Subscribe