Thursday, November 12, 2015

YUAN VERY SOON IN IMF BASKET...WIN WIN FOR GLOBAL ECONOMY

We might be on the verge of witnessing another historic moment in our life when IMF would be adding up Yuan as the reserve currency.  It might happen now or may be later but there is no doubt about not being included in the IMF basket. In the recent past it have been witnessed that the usage of renminbi has expanded by 21-fold since 2010, and the currency has appreciated by 25 percent against the US dollar over the past 10 years. Further according to the international bankers its being expected that hat 28 percent of the international trade to be denominated in RMB by the year 2020. 

The renminbi recently made it to the list of top five most used currencies, leaving behind the Australian and Canadian dollars. Chine government has taken all steps to get their currency to be cleaned from all sort of dirt so that it becomes crystal clear to understand for the global economy. But why did China being such an conservative county came forward to clean the currency and make it in all term possible for the IMF to get suited according to its wishes. The Chinese spent almost $30 billion on U.S. homes in the year ending last March. They are shifting their asset base and also building assets in other countries getting stronger macroeconomic hold. Well that might look like a very positive approach for countries like Europe and US where inventories are getting sold and economic indicators are running smoothly. But over the long term China will get better hold of these economies in terms of macro as well as in terms of its macroeconomic assets. Well that’s long term threat which might not be visible now. Lets get back to the prime topic where we find that china has a cap on foreign currency transfers by individuals to only $50,000 a year. So how Chinese are buying properties in Europe and US?  Some 800 billion yuan ($125 billion) left China through underground banks in the April-October period, citing an estimate by the People’s Bank of China.

Hence its better to make Yuan the reserve currency and also IMF would be more inclined to include the same so that the $3.5 trillion of reserves the china has can be utilized. Further china also knows that historically the U.S. dollar has appreciated by more than 50 percent against the yen over the last three years, but the volume of Japanese exports has not changed significantly.  Hence the same could be true for china in the near term. Hence getting into IMF basket is going to be a win- win proposition for IMF as well as for China.  Overseas investments new product designing and a huge growth of financial inflow would increase in the coming days once Chinese currency is included in the IMF basket. Fund managers and CIO would come up with innovative products to lure the investment appetite and resulting more equity and debt participation and alternative investments opportunities

The initial journey would be slow but the long term history which is about to be created speaks a different language. One part of the global economy is thinking that Chinese reserves inflows are good where as the other one thinks that they are getting hold of the macro economic factors of the developed economies. The war is heading from domination of currency to domination of macroeconomic factors. Further IMF might consider it now or might take some more time to include Yuan as the reserve currency but it will happen with no doubt over it.

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