China’s Ambitious Plan to Make the Yuan the World’s Go-To Currency

China’s long-held desire to provide an alternative to the U.S. dollar will get a boost on October 1, when the yuan enters the International Monetary Fund’s basket of reserve currencies, placing it alongside the pound, euro, yen and dollar. The yuan’s ascent is a validation of the importance of the world’s second-biggest economy and the work policy makers have done to allow freer access to the nation’s markets.

The yuan’s elevation could bring billions in investments

The yuan’s inclusion in the Special Drawing Rights (SDR) basket will prompt central banks and fund managers to buy more Chinese assets, with estimates of as much as $1 trillion of inflows in a five-year period. China needs the cash, with its economy growing at the slowest pace in more than two decades.

Among the main beneficiaries will be the onshore bond market, which foreign investors have been flocking to since the government accelerated the lowering of barriers in February 2016. Global funds boosted their holdings of Chinese government debt by the most in two years in June, while the benchmark yield touched a record low in August.

Then there’s the issue of interest rates: with SDR entry, Chinese sovereign bond yields will decline further, lowering the government’s borrowing costs. The yield on 10-year Treasuries is now less than 1.7 percent, compared with more than 2.7 percent for Chinese sovereign debt.

Full article: China’s Ambitious Plan to Make the Yuan the World’s Go-To Currency (Bloomberg)

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