1st of October this year, Chinese officials were probably celebrating more than just the national day.
One of the main subjects of business articles this week was about the YUAN entering the pool of currencies the IMF use as reserve currency. Starting from 1st of October the Yuan will be part of that pool next to the USD, Euro, Yen and Pound.
Interesting about this news is that the Yuan in many ways is different from the other currencies.
According to the Bloomberg article “One of the basic definitions of a reserve currency is that it must be freely traded”
Opposite to this aim, the Yuan is commonly subject to speculation about china’s central bank manipulating the exchange rate and also limiting the onshore transaction to twice daily.
Despite the many alarming factors – China’s urge to boost its cash flow, and the low return yield provided by its Central Bank – the Yuan becoming a reserve currency might come as a relief to many markets and emerging economies with strong dependency on the USD. This has caused an overall depreciation on currencies in the latest 18 months.
At the moment, China’s trading market use the CNY as much as 1.8 percent for its 4.0T transactions offshore, with the remaining relying on the price of mainly the USD and other currencies.
Will this number be able to shift in the coming years allowing other countries to trade directly through CNY instead of USD?