China Moving Adroitly To Establish RMB Yuan As A World Reserve Currency
The Chinese officials’ management of the world’s 2nd-largest economy has succeeded in its Key mission closing the gap between the market value of the the RMB Yuan and its official daily value, known as the fixing.
Matching the fixing of the RMB Yuan with its market rate is an Key step before the International Monetary Fund (IMF) will consider making it one of its reserve currencies, along with the USD, the JPY, the GBP and the EUR.
Raising the RMB Yuan’s profile is a priority for the Chinese government, even during the current market turmoil. In its bid to become a world financial power, Beijing is playing a “long game,” as the Chinese do.
Note: late in Y 2014 a gap began to open between the market rate of the RMB Yuan and the fixing, which is announced daily by a branch of the People’s Bank of China, the nation’s central bank. That worried Chinese authorities, because according to IMF rules the price set in the fixing is supposed to be the one at which market transactions can and do occur. It was not.
The gap was never very wide, always inside the + or – 2% band within which the government allowed the RMB Yuan to fluctuate daily.
Then came 11 August, when China made a surprise changed the fixing, weakening the RMB Yuan by about 1.8%. The move looks like an acknowledgment of JPY’s weakness in the market more than a bid to increase China’s competitiveness. But currency traders, guessing that Beijing would weaken the currency more to stimulate exports, pushed the rate even lower.
The Chinese authorities did not try to hold the line with the fixing. Instead, they let the official rate follow the market rate precisely. If they had fought the market by setting a stronger fixing, they surely would have lost, and damaged the nation’s bid to make the RMB Yuan a reserve currency.
That may not look like such a big deal to Americans, who are used to a floating currency. In Chicago currency futures are traded right next to livestock futures.
But, the Chinese have a tradition of a highly managed currency, and do not accept the notion that currencies should be traded like cattle.
The feeling in the market now is that the Chinese have done this so it looks right, and will now manage the substance behind it.
Stay tuned…
HeffX-LTN
Paul Ebeling
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