Market Watch No.21，2015

　　OPINION

　　Yuan’s Rise Won’t Overturn the International Monetary System

　　The International Monetary Fund (IMF) is close to declaring the yuan fairly valued， making the market more optimistic about the yuan’s inclusion into the currency basket of the special drawing right (SDR)， although the IMF’s assessment is not necessarily linked to whether the yuan will be included into the SDR currency basket.

　　The IMF， currently the most important global financial public product， has been faced with stagnant reform of its governance regime. The reform of quotas has lasted five years but still has no hope of completion， undermining the influence of the organization. Concerning the frameworks of IMF reform， even if the organization’s plan to increase resources can be implemented and China becomes the third or second largest voting power， this can only be a structural supplement to the current governance scheme.

　　Disappointed at the prospect of the IMF reform， many countries have pinned their hopes on the emergence of alternative forces to the U.S. dollar. Just at the moment， the yuan’s international status keeps rising. Supported by China’s huge trade volume， the yuan is becoming the world’s second largest trade settlement currency after the U.S. dollar. Rapid improvement of China’s outbound investment capability， the implementation of the Belt and Road Initiative， as well as the breakthroughs China has made in providing financial public products have remarkably increased the preference of other countries for using the yuan. The Chinese currency is playing a bigger part in global investment activities and the global reserve system.

　　In the meantime， the Chinese Government is relaxing its control over the yuan under the capital account. If China’s central bank allows the full convertibility of the yuan under the capital account at the end of this year， the yuan will play a more important role in the international currency market.

　　With the yuan more widely used in the global market， the currency has seen its international influence rising. It is expected that the yuan will be included into the Morgan Stanley Capital International All Country World Index within two years and may account for 10 percent of the index. Various central banks and sovereign wealth funds are also increasing their yuan-denominated assets. At present， Hong Kong， Singapore and London have become yuan offshore centers， and progress has been made on the European continent， in the Middle East and North America. The Chinese central bank is accelerating the establishment of a global yuan clearing center. All these have laid a solid foundation for the yuan to become an international currency.

　　As the yuan is more widely used in global trade and investment settlement as well as the reserve currency system， the world may see an Era of Yuan in around 2020. However， it is not professional or realistic to regard the rise of the yuan as a revolution of the existing monetary system.

　　In the global monetary system， the yuan is far less important than the U.S. dollar， euro， British pound or Japanese yen. In terms of cross-border payment， the proportion of the yuan is less than 5 percent that of the U.S. dollar and is only 6.6 percent that of the euro. In the international reserve currency system， the U.S. dollar， euro and the yuan account for 60 percent， 25 percent and 1.98 percent respectively. In the international bond and paper markets， the euro and the U.S. dollar account for 45 percent and 36 percent respectively， while the yuan accounts for less than 1 percent， also lower than the pound and yen， which represent proportions of 9.5 percent and 2.2 percent respectively. The global bulk commodity trade is almost dominated by the U.S. dollar.

　　Among major world economies， the United States， Germany and Japan have the highest quality of growth. Particularly， the United States has a powerful manufacturing industry， unrivalled financial capital and control over value chains of high-end trade， making the U.S. dollar the most important currency in the world. The current international monetary system built by the United States for more than 200 years is now still vigorous and competitive.

　　I therefore maintain that only if China nurtures a large number of multinationals as powerful as General Electric， Apple， Exxon Mobil， Boeing， Goldman Sachs， etc. and establishes an Asia-Pacific free trade area led by China， will the yuan play a leading role in the global wealth system. However， this process will take at least 10 years.

　　In the future decade， the U.S. dollar’s strong position in the global trading and reserve systems may weaken， but it will still be a leading currency in the world if U.S. economic competitiveness and financial market do not see fundamental recessions. I think a money structure with a triangular balance of the U.S. dollar， the euro and the yuan may be formed by 2030.

　　This is an edited excerpt of an article by Zhang Yugui， Dean of School of Economics and Finance at Shanghai International Studies University， published in Shanghai Securities News

　　NUMBERS

　　21.4 tln yuan

　　Chinese banks’ loans to small and micro businesses by the end of March， a year-on-year growth of 16.8 percent

　　37.89 mln

　　China’s output of 4G mobile phones in April， representing a year-on-year growth of 472 percent

　　273.61 bln yuan

　　Foreign direct investment on the Chinese mainland in the first four months， registering a year-on-year growth of 11.1 percent

　　10%

　　Year-on-year growth of China’s retail sales in April

　　6%

　　Year-on-year growth of investment in China’s property sector in the first four months

　　5.9%

　　Year-on-year growth of China’s industrial output in April

　　12%

　　Year-on-year growth of China’s fixed assets investment in the first four months

　　12.7%

　　Year-on-year growth of China’s private fixed assets investment between January and April

　　Copyedited by Kylee McIntyre