Europe looses, USA keeps

The main news of the weekend was that Yuan was added to the basket of world’s currencies from which the IMF derives the value of its unit of account and sort of currency SDR. For many people, it is the most boring news. It is as entertaining as some difficult to understand news about some new quantum particle that was caught in CERN. But for many people, it is a ground-breaking news...

Truthfully, it is not as ground-breaking for me. Firstly, everything was announced a long time in advance and secondly, it basically changes nothing. SDR is currency only on paper. It was supposed to initially substitute dollar in the global trade but that somewhat – as we can see today – didn’t happen. I think that it is currency only for the clerks. When the IMF gets cancelled (and I wouldn’t feel sorry about it because just like the OSN it’s not working anymore and is therefore useful), this currency will end as well. The background of this situation is more interesting.

There is politics behind adding Yuan to the basket of currencies. According to the definition, the reserve currency is supposed to be calculated based on the condition of the market and should be used during the financial transactions. Juan doesn’t meet these criteria. China is still very strictly changing the exchange rate of its currency. China shocked financial world last year with devaluation of its currency and since then allowed Yuan to depreciate to almost six-year minimum. The exchange rate is not being controlled by an institution similar to western central banks; several institutions take part in this process (besides the central bank it is National development and reform commission, Ministry of commerce, Banking regulatory commission, the State administration of foreign exchange). To us, it is something impossible to understand. The rating agency Fitch claimed that they don’t expect a change of demand for Yuan and won’t be changing its rating either.

In any case, it is a success for China, even when it’s only on paper and political. China is once again showing off its muscles in the global economy. It has already opened its market with long-term bonds to speculators this year. That sounds very appealing together with the label of reserve currency. Long-term it is opening space for appreciation of Yuan. It is important to put emphasis on the word “long-term” because it doesn’t look the best with China short-term. In reality, China one of the main global risks.

Interesting is that: Yuan will have 10.92 % share in the basket of currencies forming SDR. As a result of adding another currency to the basket the share of the euro will get to 30.93 % from previous 37.4 %. The share of the dollar almost won’t change. What is that saying to us? IMF is suggesting that in their eyes Europe reduced its influence because of the competition with China but the USA is still holding on.