China Marks Milestone With Yuan’s Entry Into IMF Reserve Basket

Meihan (Dawn) Zhao & Yuan (Doris) Xu

16/10/28

Fresh Highs Against Euro & Yuan

1ECB announced to extend its bond purchases

2Expectation for a rise in USD

QE in Europe

Sep 2015 appreciation: The FED did not raise interest rates.End of Oct, 2015: The FED announced to extend liquidity supply.

Discussion

What Influences Forex Rate?

Theory of International Indebtedness

Theory of Purchasing Power Parity

Monetary Approach

Fresh Highs Against Yuan

The existing depreciation pressure• Trade & Monetary policy

Depreciation anticipation•70% chance that US federal reserve will raise rates in Dec

Trigger•Entry of IMF Reserve Basket

Fresh Highs Against Yuan

Yuan’s Entry into IMF Reserve Basket

On Oct 1, the Chinese currency was added to the IMF's SDR

basket, joining the dollar, the euro, the yen and the pound.

an international reserve asset, created by the IMF in 1969

March 2016, 204.1 billion SDRs (≈ $285 billion)

SDRs can be exchanged for freely usable currencies.

a basket of five major currencies—the U.S. dollar, euro, the

Chinese renminbi (RMB), the Japanese yen, and pound

sterling—as of October 1, 2016.

Special Drawing Right SDR

1

The currency must be freely usable 2

Two Criteria Determine Whether A Currency Can Be Part of The SDR

Its issuing country must be a major exporter

✔️ Over the past five years, China’s exports averaged 11% of the global total.

❌ fully convertible ✔️ widely used in international transactions ✔️ widely traded in global markets

China will use this opportunity to further deepen economic reforms and open up the sector to promote global growth.

The move is largely symbolic and will have minimal impact on foreign demand for yuan assets, offering little support for the currency.

What do you think?

Point of Views

Let’s start!

The affirmativeYuan’s Entry into SDR does more good than harm to China.

The negativeYuan’s Entry into SDR does more harm than good to China.

Rules• Each team consists of 4 speakers • Preparation 5 min• Speech 3+2+2 min each team• Free debate 4 min in all• Questions 4 min in all• Conclusion 3 min each team

The Debate

It’s an important milestone in the integration of the Chinese economy into the global financial system.

The inclusion and the internationalization of the Chinese currency will take reforms on the mainland to a higher level.

The yuan will be increasingly used in international trade as the currency for settlement.

Benefit export-oriented enterprise

Convenience of travelling abroad

…………

Advantages

The yuan could weaken in the near term if the Chinese currency is allowed to more accurately reflect the relative state of major economies.

If China fails to meet expectations on transparency and financial reforms, Beijing could risk losing credibility or even its place in the IMF currency basket.

Stock fluctuation

Harm import-oriented enterprise

Increase the cost of studying abroad

……

Disadvantages

Exchange System

Pegged Exchange Rate SDR: Morocco

Currency board System: HK

1 Kind of “fixed”

Managed Floating Rate System: China

Median system2

Most western countries

3Floating exchange rate system

Trade-off: Which Is The Best?

The Impossible Trinity

Fixed forex rate

Independent monetary

policy

Free flow of capital

Expectations of Yuan

Exchange Bank Stock Gold ……

Investments of Yuan

Exchange rate

Thank You!

16/10/28