As the Chinese renminbi (RMB) joins the league of global reserve currency along with the US dollar, British pound, euro and the Japanese yen, Jameel Ahmad, Chief Market Analyst at ForexTime- a Europe-based forex think tank- throws some light on its long- and short-term impact on the global currency markets.
Interview by Himanhsu Vatsa | The Dollar Business Bureau
The Dollar Business (TDB): The International Monetary Fund (IMF) has included Chinese yuan among the reserve currency basket? What will be its impact on global trade?
J Ahmad: The IMF confirming the introduction of the Chinese yuan into the prestigious SpecialDrawing Rights (SDR) signified both how important China has become to the global economy, andthe potential of the yuan when it comes to global trading in the future. It is still very early to tell w hether the introduction of the yuan into the SDR is going to have an impact of global trade, however it is possible that investors might now begin to planhow they could use the Chinese yuan to hedge their portfolio or to trade the currency more freely in the future and use it to pay for products.
- During the quinquennial review of its SDR (Special Drawing Rights) basket, the International Monetary Fund (IMF) included Chinese yuan as fifth reserve currency. The change will come into force from October 1, 2016
TDB: How the move will affect the currency value of emerging economies? To what extent can itaffect India's foreign trade?
J Ahmad: There is a possibility that the move to introduce the yuan into the SDR might increase investor sentiment towards the emerging markets, however this is something that would needto be monitored over the upcoming period to see if there has been any impact. The same applies as to how it could affect India's foreign trade, although most are expectingthat the trend of the Chinese economy remaining weak will continue over the upcoming year,andwith the China economy slowing downit is possible that India will encounter reduced demand from China for its products.
TDB: Do you think a more freely-traded yuan and open markets can raise the risk of capital outflow from China and add volatility to the country's trade prospects?
J Ahmad: This could work both ways because although it is true that more accessibility of theyuan could increase capital outflows from China, the move to introduce the yuan into the SDR signifies how important China has become to the global economy and could also encourage further purchasing of the Chinese yuan. It should not be understated that despite the China economy slowing down, there are still expectations for Chinaat some point to become the world's largest economy and the inclusion of the yuan into the SDR might even encourage further Foreign Direct Investment (FDI) into China.
TDB: Since almost all countries have trade relations with China. How do you see the possibilty of a surge in yuan buying globally? Do you think the yuan will displace the dollar's prominence as a reserve currency in the long run?
J Ahmad: It should not be understated that this move does make the yuan one of the reserve currencies in the world, and is a step towards achieving prominence as the major reserve currency in the world. However, we are still a long distance away from the yuan replacing the dollar and stakeholders will require further progress on the opening up of the Chinese financial markets before the yuan can catch up to the dollar. In reference to the possibility of a surge in the yuan globally, many expect the yuan to continue drifting lower in the immediate term with the China economy slowing. But we see the potential for increased yuan purchasing in the longer-term future.
Jameel Ahmad, Chief Market Analyst at ForexTime
02, December 2015 | 2:40pmIST