The International Monetary Fund added China’s yuan to its special drawing right (SDR) basket of currencies starting Oct. 1. The yuan’s weight is 10.92 percent, the third largest after the dollar’s 41.73 percent and the euro’s 30.93 percent. Given that the euro’s status would fall following Britain’s exit from the European Union, it’s not too much to say that the Chinese currency ranks second.
International financial markets have remained calm despite the yuan’s inclusion, but the launch of the new SDR basket is quite significant.
First, the yuan, also known as the renminbi, is being established as a bridgehead for becoming a key currency to oppose the greenback’s global hegemony. The inclusion also means that China’s banknotes have grown strong enough to be trusted by the international community and that Beijing has already been integrated into the international monetary and financial system.
The yuan’s status upgrade is the result of both Washington and Beijing having found common ground.
The United States expects it to help stimulate the opening of the Chinese capital market and boost its influence in the world’s second-largest economy. China, for its part, apparently intends to nurture the renminbi as a key currency even at the expense of expanding its market opening.
Central banks around the world have no choice but to increase yuan-denominated assets in their foreign exchange reserves in the wake of the yuan’s inclusion in the SDR basket. Businesses also will have to expand settlements through the Chinese currency amid speculation that the dollar-yuan currency brawl might deepen.
Of course, it’s hard to expect the Chinese currency to go head to head against the greenback soon. As of July 31, the yuan is no match for the dollar when it comes to the proportion of international settlements with 1.9 percent against 41.3 percent. Global investment banks also predict that the yuan’s weight in the central banks’ foreign exchange reserves, which stands at 1 percent now, would manage to reach 5 percent five years from now.
The emergence of the yuan offers both opportunities and challenges to the Korean economy, which relies heavily on China.
If trade settlements through the renminbi grow, Seoul can expect its excessive dependence on the greenback to ease and transaction costs to decline. On the contrary, even small jitters in China could take a toll on the Korean economy. What is most fearful is that Korea’s trade dependence on China might deepen further.
Admittedly, changes in the global financial order are inevitable following the yuan’s upgrade. Our financial authorities and businesses should scrutinize its repercussions and make thorough preparations.