China: Chinese currency weakens to over-four-year low after IMF includes yuan in SDR basket
December 14, 2015
Four months after the People’s Bank of China (PBOC) unexpectedly devalued the CNY and established a new system to set the value of the Chinese currency more according to market forces, the currency lost further ground and, on 11 December, it hit the lowest value since July 2011. On 11 December, the Chinese yuan traded at 6.46 CNY per USD, which was 1.4% weaker than on the same day in the previous month. The currency has lost around 4.0% of its value since the beginning of the year.
The Chinese yuan is under pressure due to strong capital outflows amid concerns about the health of the economy and loss of confidence caused by the summer turmoil in China’s stock markets. Moreover, the expected monetary policy rate normalization in the United States is diminishing appetite for emerging-market assets. While the deprecation of the CNY has the potential to boost China’s faltering exports, if sustained, this situation could threaten the global recovery as China’s export rivals could also adjust their exchange rates, thereby entering into a currency war for a period.
The weakening of the Chinese currency came along with the IMF’s decision to include the yuan in the Special Drawing Rights (SDR) basket on 30 November. Effective from 1 October 2016, the yuan will become the fifth currency in the basket used to value the SDRs, with a weight of 10.92%. The U.S. dollar has the largest quota (41.73%), while the euro is in the second position with 30.93%. The Japanese yen and the British pound close the list with a share of 8.33% and 8.09% respectively. Although analysts do not foresee a decisive immediate impact in the foreign-exchange market nor in capital outflows, it is a major backing to the slow but steady economic reforms Chinese authorities have implemented in the last few years. That said, this situation also adds further pressure on the authorities to continue allowing market forces to have a more decisive role in the economy and increase transparency.