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controls the flow of money into and out of its economy but has encouraged the use of the
renminbi abroad, especially for trade, which helps Chinese exporters by eliminating the
cost and risk of volatile exchange rates. Since 2009, China has signed currency swap
agreements with central banks in Britain, Brazil, Canada, Indonesia, South Korea and
other countries. Branches of Chinese state-owned banks in Britain, Australia, Germany,
Switzerland, Russia, France and Singapore have received authorization to take deposits
or settle trade-related transactions in renminbi.
Impact on Global Finance
The SDR has no direct link to financial markets or private business. Over time, the IMF
decision might prompt central banks to hold more reserves in renminbi. JP Morgan
economist Haibin Zhu said renminbi holdings might rise to 5 percent of global reserves,
or about $350 billion, over five years. That might encourage more use of renminbi for
trade and investment. "Longer term, this is a huge step", said Stephen Innes, chief
trader for the currency firm OANDA in Singapore. "Once investors become more
comfortable with Chinese markets, especially if they continue to progress with opening
policies and make the same strides they did over the past year, international markets
will really embrace Chinese capital markets".
Impact on China
Economists say the IMF decision could encourage Chinese leaders to further relax
controls on the renminbi. The ruling Communist Party's latest five-year development
plan says the renminbi will be "freely tradable and freely usable" by 2020. The surprise
August introduction of a new mechanism for setting the government-controlled
exchange rate led to 3.5 percent devaluation. However, the country's top economic
official, Premier Li Keqiang, said in September that there were no plans for further
declines. Some traders worry Beijing might devalue once it achieved its goal of being
added to the IMF basket. But others say Chinese leaders want to be seen as reliable. The
renminbi's addition is "an endorsement as an international currency", said Chen Kang,
chief bond analyst for SWS Research Co. in Shanghai. "That will encourage China to
adopt more measures toward accelerating the process of the opening of its foreign
exchange markets and capital markets".
Unintended Consequences
The renminbi's government-set exchange rate still follows the dollar despite the new
mechanism for setting its value. For now, that makes the renminbi a dollar in disguise,
according to Derek Scissors of the American Enterprise Institute in Washington. Until
the renminbi is allowed to trade freely, the IMF decision will "increase the dollar's
importance", said Scissors. "Those governments or investors hoping for a dilution of
dollar dominance for portfolio diversification or political reasons are getting exactly the
opposite".