​What Will be the Impact of the Addition of the Chinese Yuan to IMF Reserve Currency in October?

V. David Ben Melech  |

With a population of over 1.3 billion, a controlled economy and an aggressive monetary policy, China has become a true force in the world economy. In the past decade, China has become the largest manufacturing economy in the world, as well as the world's fastest growing consumer market. In addition to its powerful and lucrative manufacturing sector, the China consumer sector is showing its strength. China is the birthplace of Alibaba (BABA) (the largest online marketplace in the world) and soon, two Disney (DIS) theme parks – showcasing the country’s increasingly growing middle and upper middle classes with disposable income for shopping and traveling.

Given China’s phenomenal growth, many economic experts were not surprised that China lobbied for its currency, the renminbi (RMB) or Yuan, to be included in IMF’s Special Drawing Right, or SDR, according to the International Monetary Fund (IMF). In another sign of China’s growing clout, in April, the Shanghai Metal Exchange took the extraordinary step of pricing gold and silver by the gram in Chinese Yuan. At the start of 2016, the primary Chinese bullion coin, the Chinese Panda, was converted away from the US weight system to the metric system, with its 1-ounce panda being replaced by a 30-gram strike for 2016.

“We are seeing a strategic shift from west to east and it starts with a change to the way we calculate the cost of precious metals,” explains Anthony Allen Anderson, Senior Partner at GSI Exchange in Calabasas, California, a leading precious metals and bullion dealer. “Once the world looks at precious metals in Yuan by the gram, the Chinese will exert increased influence over the world's gold and silver markets, which will ultimately contribute to the decline of the supremacy of the US dollar in world markets,” says Anderson.

According to the IMF, the decision to add the RMB to IMF’s Special Drawing Right marked the first time in over 15 years that the list of currencies comprising the SDR has been altered. "The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” said the IMF’s Managing Director, Christine Lagarde. According to published reports, China International Capital Corporation (CICC), a prominent brokerage firm said in response to the announcement, "[e]fforts for the yuan to be included in the SDR have become an irreversible push towards financial liberalization, which will have a profound impact on China's economy.”

The SDR is made up of IMF member countries that can borrow money (with favorable rates) from the IMF's reserves in any of the currencies listed in the SDR basket. The SDR now includes the US Dollar, the Euro, Japan's Yen, and the British Pound.

Experts speculate that China’s interest in being included in the SDR has more to do with China’s ambitions to be a credible economic force versus its desire to use the SDR for its own economic purposes. Sources also point to China’s desire to provide a new valuation of the RMB as another motivation for joining the SDR.

Likewise, the IMF decision to include the RMB is a reflection of how the current global economy is changing with China as a major player. This move to include China in the SDR is a recognition of China’s progress in moving toward a more open and market-based economy.

“We don’t expect the addition of the currency to the SDR will have a material impact on the markets, however, it is another sign of China’s efforts to assert itself on the world’s economic stage,” says Anderson.

V. David Ben Melech is a former securities attorney and has over 15 years of experience providing a wide range of legal and strategic advisory services to Fortune 500 companies and financial institutions on a broad variety of regulatory, enforcement, compliance, risk management and transactional matters.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
BABA Alibaba Group Holding Limited American Depositary Shares each representing one 168.99 3.19 1.92 22,442,504 Trade
DIS The Walt Disney Company 140.40 0.46 0.33 8,842,168 Trade

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