Beijing announced a new devaluation of the Yuan to boost its economy
April 12, 2016
The IMF hampers international ambitions of the Yuan
The use of the renminbi has “increased” on the globe but an “important work” remains to be done to determine if the Chinese currency may join the reference currency of the International Monetary Fund, announced the institution.
“The international use of the renminbi has increased, albeit from a very low”, the IMF estimated in a report on Tuesday, August, 4th. Indeed, the Yuan has become the 5th most used currency in international payments, while in 2013, the Chinese currency only occupied 13th place in the ranking of the most used currency internationally.
Beijing is responding to an important first test of the institution headed by Christine Lagarde for the right to expand the use of its currency outside its borders obtaining its inclusion in the special drawing rights (SDRs). This is the unit of account of the institution of the IMF in the form of a basket currently consists of four currencies (dollar, euro, pound and yen).
In addition, the convertibility of the Yuan is still tightly controlled by Beijing, to the chagrin of the United States that ensures that the currency is artificially undervalued in order to boost the competitiveness of Chinese exports. But the IMF believes that the money “is no longer undervalued,” which is another good point for Beijing.
China has again lowered the central rate of the Yuan, Wednesday, August 12. China’s central bank (PBoC) announced that its currency, hitherto strictly regulated now take more account of market fluctuations. This decision of Beijing is first motivated by the need to halt the decline in Chinese exports, reflecting an 8.3% drop in July.
After a surprise announcing (Tuesday, August 11) a devaluation of the Yuan by 2%, Beijing lowered for the second time in 24 hours the reference rate of the Yuan against the dollar by 1.62%. The PBoC has reduced the central rate around which the Yuan is allowed to fluctuate at 6.3306 Yuan to one dollar (against 6.2298 Yuan on Tuesday).
The renminbi (RMB, for “people’s currency”) has reached its lowest level in four years on Wednesday, August, 12th.
Bank of China tried to calm things down. It ensures that the measure is “one action” and refutes the idea of a prolonged devaluation. But the qualified intervention of “unique” has yet been renewed on Wednesday morning by the PBoC.
“Given the international and domestic economic situation, nothing now justifies a further depreciation of the Yuan,” said yesterday the China People’s Bank in a statement.
With this announcement, Beijing sends a signal, particularly in the United States who believe, for many years, that China artificially undervalues its currency to boost its exports. However, the country has reacted cautiously yesterday to the announcement. For if Beijing responds to Washington’s demands, this devaluation may have an impact on exports.
First silent, the US Treasury finally declared it was “too early” to assess the implications of the Chinese decision.
“A positive step” from the IMF
Minutes before this new devaluation, the IMF welcomed a “positive step” after the Beijing ads on greater flexibility of the Yuan.
“The new mechanism appears to be a positive step that will allow market forces to play a greater role in determining the exchange rate”, the International Monetary Fund has estimated, in a statement, referring to the first devaluation of movement.
The exact impact of this measure, very cautiously welcomed by Washington, will depend on how “it will be implemented,” said the IMF, which ensured that Beijing would eventually aim for effective flexibility in the Yuan “both in next three years.”
DTS: the devaluation will have no impact on the decision of the IMF
However, the institution of Washington persists and signs, and ensures that these measures will have no “direct involvement” in its decision to include or not the Chinese currency among international reference currencies.
The Fund is currently considering a request from Beijing to integrate the renminbi to cart international reference currency that the IMF uses for its special drawing rights (SDRs). For now, the institution’s unit of account is made up of four currencies (dollar, euro, pound and yen).
The IMF, which must rule in November, recently assured that the selected criteria will be whether the Yuan is “freely usable”.
If the institution considers that the announcement of Beijing “has no direct involvement” in its evaluation, it recognizes in its statement that a more flexible Yuan “will facilitate operations” in special drawing rights .. .if the Chinese currency is accepted among the IMF’s reference currency.