Tuesday, February 16, 2016

ECFR - China, the Yuan and the IMF - Double Down or Quit?

The European Council on Foreign Relations (ECFR) runs this new article which says that China seems to be backtracking on its pledge to increase market reforms. The article says with the downturn now taking place in China they are faced with some tough choices now. Below are a few quotes from the article.


"China faces a stark choice: double down or back down on market reforms in order to achieve its long-held ambition of establishing the yuan as a fully international currency, according to a new report from ECFR.
China, the yuan and the IMF: Double or quits?” is the latest edition of China Analysis, which examines Chinese-language sources to understand the Chinese view on current affairs. This edition focusses on Chinese reactions to the IMF decision to establish the yuan as a “freely usable currency” with the basket of currencies with Special Drawing Rights (SDR). This move from the IMF comes despite the Chinese yuan falling someway short of being a being a fully internationalised, “freely tradable” currency.
Since the much-discussed slowdown in Chinese growth which has taken place in the last few months, Beijing’s willingness to undertake the required market reforms to internationalise the yuan has seemingly waned. This reluctance is explored by Chinese authors who acknowledge that the Chinese government is unwilling to tolerate the free rising and falling of the yuan." . . . .
Here is the Conclusion section of the pdf version of the analysis:

"Overall, it is clear that Chinese observers recognise that the yuan’s SDR inclusion has mostly a symbolic significance. Even so, they underline its importance in opening the way for China to play a greater role in the international monetary system – an opportunity that Beijing will no doubt seize with its presidency of the G20 in 2016. 
While praising the reforms conducted to date, many of the observers also point to the significant reform efforts that have yet to be made, all of them necessary to turn China’s yuan into a truly international currency. However, writing around the time of the SDR inclusion, most of them do not reflect on the government’s recent attitude toward China’s foreign exchange policy. 
A statement made by Xi Jinping’s aide for economic and financial affairs, Liu He, is quite representative of the situation as a whole. Liu recently said that “financial regulators must have the courage to stand against the market”, suggesting that China may still be unwilling to tolerate too much bi-directionality in its financial and foreign exchange markets, and may continue to intervene and seek to control this market for some time to come."

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