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Why China Wants Yuan to be the World's 5th reserve Currency
China is a step closer to obtaining special drawing rights status for its currency from the IMF, a move that would see the Yuan joining the greenback, Euro, Yen and British pound. Addition to the SDR would add Yuan to the basket of currencies IMF member countries can count toward their official reserves.
Here are a few reasons why China wants the Yuan in:
1. GLOBAL PRESTIGE While China has become the world's second largest economy, its currency has lagged behind in international stakes. SDR status ?will be recognition of China's rise,said Xi Junyang,a finance professor at Shanghai University of Finance and Economics.
2. LOWER BORROWIN GCOSTSA reduction in regulations on capital flows accompanying China?s SDR push will result in an internationalized yuan. That may help Chinese companies venture abroad and cut their borrowing costs.A more open capital market can better meet domestic firms financing needs,HSBC Holdings analysts including chief China economist Qu Hongbin wrote in a note.Capital account convertibility and associated reforms are well aligned with China's long term financing needs.
3. A MULTI-POLAR WORLD China's strategic view is for a multi-polar world where the U.S. is just one player rather than a hegemon. In the past,Zhou has called for expanded use of the SDR as an alternative to the dollar. Globally recognized reserve status makes that a step closer, at least on the currency front.
4 . PRICE SETTER The yuan's use to settle cross-border trade and investment has been rising, but the currency isn?t used to set prices of international commodities from oil to iron ore.It may help to make the yuan a pricing currency,said Shanghai University's Xi. That means more influence in setting global commodity prices. It will also help remove currency volatility . More than half of businesses surveyed by HSBC this year expect to increase their cross-border trade with China in the next 12 months, according to the bank?s RMB internationalization.
5. YUANDEMAN DEMAND More than 60 central banks currently invest in the yuan, according to an estimate by Standard Chartered Plc. A move into the SDR basket would lure more official buyers. ?One of the key practical implications is that all central banks around the world would become holders of RMB exposure overnight,said Jukka Pihlman, global head of central banks and sovereign wealth funds at Standard Chartered.But even more significant thing is the automatic acknowledgment of Official Reserve Currency status, which would remove the re- APRIL 2015 banks wanting to invest in RMB.
6. REFORM DRIVER To win the SDR prize,China will have to press on with plans to open its capital account a reform that stands to shake up industries and the way Chinese companies do business.It will make Chinese officially more confident in, say, pushing forward full yuan convertibility,said Li Jie, head of the foreign- exchange reserve research office at the Central University of Finance and Economics in Beijing.
7 . IMF RECOGNITION For PBOC Governor Zhou, SDR status would represent endorsement from the IMF for his reform efforts that have also included steps to liberalize interest rates and ease the so-called financial repression of savers subsidizing investment-led growth.