Yuan as a Reserve Currency

The International Monetary Fund is considering the Yuan as a reserve currency. What does this mean for the Chinese currency, the US dollar and you as a Forex trader? According the Bloomberg Business Yuan forwards indicate that the People’s Bank of China will let the Yuan decline in value next year.

Forwards traders are stepping up bets that China will let the yuan weaken in 2016, after the IMF decides on the currency’s eligibility for reserve status.

Speculation that the People’s Bank of China will allow greater volatility after the International Monetary Fund meeting in November is spurring bearish bets on contracts longer than six months, said Dennis Tan, a foreign-exchange strategist at Barclays Plc in Singapore. The attached chart shows 12-month non-deliverable contracts dropping 0.4 percent so far in July, while the one-month are little changed.

“Investors are concerned that the yuan will be more volatile and face downward pressures without the PBOC’s support after the review,” said Tan. “The plunge in mainland equities hurts sentiment and has spillover effects on other asset classes.”

Step by step as China becomes a mature partner in the economic and monetary world it needs to abide by the rules. China will need to stop manipulating its currency and that probably means downward pressure on the Yuan because of a slowing economy and the current stock market decline.

The Yuan as a Reserve Currency

The Financial Times reports that the Chinese renminbe is ready for reserve currency status.

The renminbi is on a seemingly inexorable march towards becoming a global currency. It is already widely used in international trade and finance transactions. Now China wants the International Monetary Fund to label the renminbi an official reserve currency by including it in the exclusive group that make up its unit of account, the Special Drawing Rights. That group comprises the dollar, the euro, the yen and sterling.

There are good reasons to welcome the renminbi’s rise. Its trajectory is closely correlated with banking and other reforms that will make China’s economy more market friendly. These are necessary to establish a more balanced and less-risky growth path, one that is less dependent on investment, generates more employment and reduces environmental degradation.

Renminbi is the other name for the Yuan, the Chinese currency. China would like the prestige and the economic benefits of reserve currency status. But there are strong special interests in China that benefit from the tight control that the Communist Party exerts on the value of the Yuan. The benefit to everyone else will be that China will not be able to so easily manipulate its currency and will need to move more toward a market driven system.

How Should I Trade?

One point of view is that when the Yuan trades freely that many foreigners will buy Yuan. But many Chinese investors are working hard to get out of the Yuan. Smarter Analyst looks at the two possible routes for the Yuan.

What are the insiders doing? They’re shoveling their money out of the country so fast it’s going to catch fire from the friction. This is what the insiders are doing.

It would seem that smart Chinese investors have looked at the collapsing real estate market, dropping stock market and slowing economy and are looking to convert their Yuan and set up shop elsewhere. If the Yuan as a reserve currency allows it to truly float this could drive the currency down at least over the short term.