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Yuan joins IMF’s elite currency club; Korea’s bid for ‘financial hub’ makes little headway

Yuan joins IMF’s elite currency club; Korea’s bid for ‘financial hub’ makes little headway

Posted December. 02, 2015 09:37,   

한국어

China’s yuan has been admitted to the elite currency club as basis for the International Monetary Fund’s special drawing rights on Monday, joining the premier league of global currencies. The Special Drawing Rights (SDR) is a kind of "virtual global reserve currency" with which an IMF member state that faces a fiscal crisis can withdraw fund from the international financial body. The yuan is the fifth currency to join the club after dollar, euro, pound and yen, and will be included in the basket on October 1 next year. As China has achieved "financial rise," living up to its stature as the world’s second largest economy, international financial order will likely embrace many changes.

In order for the yuan to be used immediately as a key currency like the dollar, it has to address many challenges. The People’s Bank of China does not have the right to set interest rates by itself, and is influenced by the Chinese government. The Chinese government has frequently intervened in the capital market by arbitrarily depreciating the yuan in order to shore up its export. China failed to join the SDR club in 2010 because the exchange rate was not determined by the market while its policy-making process was not transparent.

The U.K. daily Financial Times said again this time that the yuan`s inclusion in the SDR basket of currencies was a political decision resulting from China’s lobbying. As China ranks No. 1 in overall trade volume with 4.3 trillion U.S. dollars, and its currency ranks fourth as means of international settlements, the inclusion cannot be necessarily considered to be negative. Nonetheless, China should behave responsibly in the international financial market to live up to its elevated status. Only when Beijing enhances transparency and independence of its central bank, opens up its financial market, and builds up international credibility, the yuan currency will be able to play the function as a practical key currency.

Shipment to China accounts for 25 percent of Korea’s total overseas export, but more than 90 percent of the export to China is being settled in the dollar. If export transactions are settled in the yuan, companies will see the transaction cost decline, being able to cope with fluctuations of the dollar in a more flexible manner. If the Chinese financial market opens up more wide and develops further, it will present an opportunity to the Korean financial market as well. In contrast, if the Korean economy gets more deeply annexed to the Chinese economy through the means of the yuan, coupling of the Korean economy with the Chinese economy could intensify. Chances are high that the Korean financial market could become more uncertain, in tune with fluctuations of the Chinese financial market, which is still unstable.

Korea signed a currency swap contract worth about 64 trillion won (55.3 billion dollars) with China in 1999 and launched a market for direct trade between the won and yuan currencies in 2014. Korea plans to issue next year its sovereign bonds in the yuan and will include the yuan in its foreign currency reserves, which are heavily concentrated in the dollar and the euro. While seeking to secure the Korea-China free trade pact, the Korean government had announced a plan to expand the Korean financial market by pushing to establish a "yuan currency finance hub" several years ago, but the bid has progressed at a snail’s pace. In the meantime, regions of the world including Hong Kong, Singapore, London, and Paris are racing to expand yuan business. Korea must use the internationalization of the yuan as a new opportunity for the Korean economy.