YUAN’S MOUNTING IMPORT

By+He+Liping

The yuans inclusion into the International Monetary Fund （IMF）s currency basket of special drawing rights （SDR） marks 2015 as a milestone in the internationalization of the Chinese currency. A higher convertibility rate for the yuan is closely related to the improved position of the Chinese economy. Since China became the worlds second largest economy， great progress has been achieved in making the yuan more international.

Although the yuans inclusion will diversify international reserve currencies， this will not change the U.S. dollars position as a leading international reserve currency for the foreseeable future.

More convertible yuan

Chinas shifting position in the world economy can be measured by six aspects.

First， through the calculations of a U.S. dollar-denominated GDP， China overtook Japan to become the worlds second largest economy in 2011.

Second， China is now the worlds largest trading nation and the third largest economic trading zone. Chinas imports and exports of goods totaled $4.3 trillion in 2014， surpassing the United States total （$3.97 trillion）. As an economic trading zone—this refers to an average total of trade in goods and services over the past three to five years—the Chinese yuan zone ranks third after the euro zone and the U.S. dollar zone. However， the differences among the three trading zones are hard to discern.

Third， China has become one of the most important foreign investors and foreign aid providers. Every year China attracts more than$200 billion worth of foreign investment， and conversely， makes an outbound investment of about $80 billion.

Fourth， since China reformed how it determines the yuan interest rate in July 2005， the yuans exchange rate has been rising. From July 2005 to April 2014， the yuans nominal effective exchange rate has appreciated by 40.5 percent. The yuan is the only currency in the world that has appreciated this much against the U.S. dollar over the past decade.

Fifth， in the past decade， Chinas domestic financial market has been expanding. Treasury bonds played a major role in the local bond market five years ago， but now the use of corporate bonds and negotiable instruments is growing rapidly.

Sixth， Chinas financial market is more open. Chinese financial institutions are increasingly developing their overseas businesses， including， but not limited to， mergers and acquisitions， in foreign markets. Such mergers are made not only in developing countries， but also in the developed economies of Europe and the United States. Meanwhile， international capital and investment institutions have entered the mainland market in growing numbers.

The use of the yuan in overseas markets started in the late 1990s， when most of Chinas neighboring economies were beat by the Southeast Asian financial crisis. During that time， only two currencies did not depreciate against the U.S. dollar： the yuan and the Hong Kong dollar. Since then， demand for the yuan from foreign institutions and residents has been growing.

The official move to make the yuan more available internationally started in 2009， against the background of the global financial crisis that began in the United States in 2008. Three factors contribute to the yuans global prominence： Chinas growing economic and trade volume， a stable and appreciating exchange rate of the yuan， and an open economy.

According to a statement by the Peoples Bank of China （PBOC）， the central bank， in June， the yuan became the worlds second largest currency for trade and financing， the fifth largest payment currency and the sixth largest foreign-exchange currency at the end of 2014， and 23.6 percent of cross-border transactions between China and other countries were settled in the yuan. By the end of May 2015， the PBOC reached swap deals with 32 countries and regions， hitting a total value of 3.1 trillion yuan （$484.37 billion）， and reached yuan clearing arrangements with 15 countries and regions.

Remarkable progress has been made this year in the globalization of the yuan. Several factors have advanced its progress， including the governments promotion， the Belt and Road Initiative， the establishment of the Asian Infrastructure Investment Bank and a settlement system.

Was joining necessary？

Regardless of the progress， just how important is it for the yuan to be included into the SDR basket？

The SDR is an important reserve asset created by the IMF in 1969 to supplement its member countries official reserves of gold， foreign exchange and IMF quotas. Now the SDR is used mainly for three purposes： In all of the IMFs statistical reports， currencies are calculated via the SDR. Through the SDR， IMF member countries can lend and borrow internationally. In addition， the SDR is also used by the private sector.

Although the U.S. dollar and euro are both international reserve currencies， the SDR is still a super-sovereign international reserve asset whose price is stable. It is not yet an international currency or a composite currency， but in theory it can become a composite currency. The SDR is a measurement of various currencies. It can be used as a kind of reserve asset， although it cannot be used for payment at the moment. The SDR can also make cross- border capital flows less fluctuated. As it is now a basket of reserve currencies， it is plausible that it can be developed into a supra-sovereign currency in the future.

Since China became the worlds second largest economy in 2011， the yuans inclusion will enhance the SDRs global representation. With a fifth currency in the basket， the SDR will ensure a stable value， and IMF member countries will have more options in deciding their reserve assets. The SDR will henceforth become more appealing. Why has the scale of the SDR not expanded for so many years？ Possibly because it is not appealing enough. But if it becomes more agreeable， it will definitely be more widely used.

International monetary reform

After the yuans inclusion into the SDR， will the U.S. dollar be used less in international reserves？ Will there be more international reserve currencies？ The emergence of the euro used to represent the diversification of international reserves. But once the legal tender was created， international reserves actually become less diversified， since the euro replaced 11 European currencies.

The U.S. dollars account for a large proportion of international reserves， mainly because the foreign exchange reserves of developing countries have kept growing rapidly within the past three decades. Changes in foreign exchange structures in developing countries relate to their exchange rate regimes， foreign debt sizes， policies addressing financial crisis and their options of foreign exchange reserve currencies. In their current structure， developing countries have few choices in terms of selecting currencies， and the small scales of their domestic financial markets also restrict their options.

Progress for the diversification of international reserves has been very slow in the past， and has even regressed in some cases. The yuans inclusion into the basket of foreign exchange reserves for various countries makes stocks of reserve currencies more diverse. The concept of a supra-sovereign currency is currently only in discussion inside academic circles worldwide， mostly because a worldwide currency must be supported by international treaties. It involves international relations， therefore it cannot be decided only by the market. Readjustments of international relations will require consultations and compromises between countries. Step-bystep progression can be made in a peaceful environment.

The internationalization of the yuan will be an important factor in advancing the reform and evolution of the international monetary system. Without the yuans internationalization and inclusion into the SDR， the structure of international monetary relations would be the same as it was 30 or 40 years ago.

Even though the yuans inclusion into the SDR has brought one more optional reserve currency， the U.S. dollar will still be the most important international reserve currency for a long time yet.

The U.S. dollars now account for 63 percent of total international foreign exchange reserves， tripling the proportion of U.S. GDP in world total. In the next decade， the dollar may be used less in international reserves， but the proportion could still be over 50 percent.