The recent inclusion of the Yuan in IMF’s SDR basket may not be entirely good news for that country. Further, an imploding China will lead to more pain for emerging markets.
To put it in perspective, Saugata Bhattacharya, Chief Economist, Axis Bank hits the nail on the head when he says: “While a significant step in internationalizing the Yuan, the implications on global foreign exchange rate and the Indian Rupee are likely to be limited in the near term. India should utilize the opportunity to diversify its currency holdings.”
Dong Bao of Credit Suisse says: “The IMF’s executive board announced it will include CNY (Chinese Yuan Remnibi) into its Special Drawing Rights (SDR) basket. After the inclusion of CNY, the SDR basket will include USD, EUR, CNY, GBP, JPY. CNY will be given 10.92% weights in the SDR basket.”
China’s economy slows down as we debate its reasons. Diehard fans of the Chinese economy and culture remain steadfast to the view that the slowdown in China’s economy is a temporary blip. Others feel it is still not a bad thing as it had grown inordinately in the past few decades. They say, the current slowdown was expected and is in line with China’s growth.
Others like Sahil Kapoor, Chief Economic Strategist, Edelweiss Broking believe, “inclusion of Chinese Yuan in the IMF-managed asset called the Special Drawing Right, or SDR, is purely symbolic. SDR’s were created in 1969 and include the US dollar, the euro, the British pound, the yen and now the Chinese Yuan. Whatever usage SDR’s have is limited to IMF’s accounting particularly for reserves held by central banks and governments. The inclusion at best recognizes the growing importance of Chinese economy and the measures it has taken to free its markets over the last few years.”
He adds: “Since the SDRs do not have a widespread usage nor the Chinese Yuan Renminbi is going to replace the US Dollar as the reserve currency any time soon. In 2014, the RMB was used by only 38 countries in their international reserves, accounting for 1.1 per cent of total foreign reserves, while the US dollar was used by 127 countries accounting for almost 64 per cent of global reserves. The euro accounted for 21 per cent. Largely the IMF inclusion appears to be symbolic and may not increase Chinese Yuan Renminbi influence any time soon.”
THE TURNING POINTS
China witnessed three great milestones in its nose dive towards becoming a sputtering, bleeding third world economy but diehard fans still refuse to accept that China is on its way down and its years of glory were artificially created by the 50 odd central communist command.
For one thing, the creation of ghost cities where the original inhabitants of that land live in slums just around these ghost cities is a glaring anomaly in China’s social growth strategy. If growth is not translating into well being for the average citizen then the economy is slowly killing itself by converting itself into a zamindar economy, where 98 per cent of the population works itself to death and the remaining two per cent enjoy a life of luxury.
Creating one or two ghost cities is not an anomaly but when the number climbs to 23, it has crossed the critical level.
Two: Chinese contract manufacturing largely fed European and American demand. Both these economies have aging populations and negligible economic growth. Now, China is trying to engage with Indian, African and South American companies for contract manufacturing.
The other demand pockets have long shifted from China. Most Canon cameras and Seagate hard discs are no longer Made in China. They are now from Taiwan, Thailand and Malaysia.
Three: Having lost their cement consumption and their manufacturing edge, China tried to push as much money they could in their stock markets. The result was a burn out of people’s savings. Now, millions have become penniless after the Shanghai markets bombed. The government held on to fizzling fireworks and is now trying to push local administration funds into the stock markets to keep the financial system running.
OSTRICH SYNDROME
Recently, Wang Xiaoyi, deputy head of the State Administration of Foreign Exchange (SAFE) in China told a news conference that flight of capital from China was under control and there was no need to panic.
Just after that the Chinese currency became a little more convertible by being included in the IMF’s SDR basket. According to Reuters, previous to this inclusion, in 2014, the RMB was used by only 38 countries in their international reserves, accounting for 1.1 per cent of total foreign reserves, while the US dollar was used by 127 countries accounting for almost 64 per cent of global reserves.
Now, with increased convertibility the Yuan may be used for two purposes; one, to attract more investment and two to enhance flight of capital to safer and more stable economies. It can also trigger off conversion of hoards of black money to safer havens.
Therefore, inclusion of the Yuan in the IMF’s basket of currencies may not be a good thing if things turn bad for China.
Today, China needs stability and along with that stability the trust of the ordinary Chinese citizen in its government. The Chinese citizen needs to understand that his home will not be arbitrarily demolished to create a ghost city or his farms will not be suddenly taken over to create a manufacturing factory.
That trust is still missing in the action by the Chinese government. Further, there is no policy to salvage what has been lost.
OPEN DOOR: INCOMING AND OUTGOING
According to Prashant Jain of IFA Global, “IMF has given 10.92% weight-age to Chinese Yuan in SDRs effective from October 2016. Among other SDR currencies the share of EUR and GBP has reduced the most. Chinese Authorities must see this symbolic inclusion as major a victory for their efforts. SDR inclusion will have direct positive impacts
i.Increase in trade settlement in Chinese Yuan
ii.Global Central Bank will increase their exposure in Yuan
iii.Reconfirm the importance of Chinese economy in context to world trade
iv.Strengthening the political prowess of China on world stage.
Apart from above mentioned benefits there would few challenges for Chinese Authorities namely- pushing the capital reforms in China, Reducing the grip over Chinese Yuan.”
However, Economictimes.com maintains that an open door can easily serve both as an inlet and also an outlet for capital.
Analysts are still counting on China continuing as a world power and their faith in China’s good fortune is based on the strength of speculation.
Take Dong Bao of Credit Suisse, who says: “We believe the inclusion of the CNY is a symbolically significant development for China. In our assessment, the actual immediate impact on the currency and capital flow may not be as dramatic. We estimate that the inclusion is more likely to bring additional capital inflow around USD 150bn to 200bn in the next couple of years.
Note that the estimate about the inclusion will lead to more inflow than outflow is based on nothing more than good faith in China’s economy. However, the turn of events during the last five years, show otherwise.
We believe China’s flight of capital will continue as there is little to hold on to it in mainland China. Anybody with a decent noodle will flee out of this soup, which is gradually getting too thick to swim in.
DISCLAIMER : Views expressed above are the author’s own.