Marking the first time a new currency has been added since the inauguration of the euro in 1999, the International Monetary Fund’s inclusion of the yuan in its special drawing rights basket two years ago was hailed by China as a “milestone” and “affirmation” of the country’s financial reform and opening-up.
It also caused quite a stir, with some voicing misgivings that the country’s incomplete capital account convertibility process – the exchange of yuan for foreign currency – would mean the yuan would fail to become a true international reserve currency. Others feared that China’s commitment to financial liberalisation might falter after the yuan was included into the basket of reserve currencies.
The increasing confidence of other countries in the use of yuan, the fast and steady rise in the yuan’s share in global foreign exchange reserves and China’s unswerving financial opening up over the past two years, have proved such worries to be unfounded.
In the second quarter of this year, the yuan’s share in global currency reserves reported to the IMF jumped to 1.84 per cent, up from 1.4 per cent in the first quarter of this year and 1.08 per cent in the second quarter of last year, according to IMF data.
Although the yuan’s share is still small compared to that of the US dollar and the euro, which account for more than 62 per cent and 20 per cent respectively, considering that it has only been included in the IMF currency basket for two years, the rise in its share is remarkable.
And the growing preference for the yuan is not without reason.
Although in the short term, the yuan does face heavy pressure given the strength of the dollar and the trade dispute with the United States, China’s stable economic fundamentals and financial opening-up policies, will ensure that the yuan’s popularity will continue to grow and its share in global reserves continue to rise in the coming years.
China has vowed to further open up its economy. In terms of financial opening-up, it has stepped up efforts to liberalise its capital account; it has also announced this year it will further open up its banking, securities, insurance and futures sectors, making them more accommodative to international investors.
The opportunities offered to foreign investors, and China’s increasingly more dynamic financial market and resilient economy, will only increase external confidence in the world’s second-largest economy, which will serve as a solid foundation for the growing demand for the yuan.