Bracing for the yuan’s rise

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Bracing for the yuan’s rise

The Chinese yuan was officially added to the International Monetary Fund’s special drawing rights (SDR) basket on Saturday. It joins the U.S. dollar, the euro, the yen and the British pound in the basket of reserve currencies that can be used for IMF emergency loans for countries in need.

The presence in the basket symbolizes the might of the currency. The yuan commands 10.92 percent, third after the U.S. dollar’s 41.73 percent and the euro’s 30.93 percent. The Chinese currency could become the world’s second largest monetary power as the euro and British pound could lose their authority and value when the British exit from the euro zone becomes a reality.

The yuan is still no match for the greenback. International settlements in the Chinese currency reached 1.9 percent as of July, compared with 41.3 percent of the dollar. The yuan will surely gain forces, but not likely rapidly. International investment banks predicted the share of the yuan in central bank coffers would likely rise to 5 percent of their foreign exchange reserves from the current 1 percent in five years’ time. Beijing had envisioned making the yuan command 15 percent to 20 percent of the world’s foreign exchange reserves by 2020.

We must not underestimate the rise in the yuan. The yuan’s rise should be a double-edged sword for us. If settlements in the Chinese currency become more common, the cost in trade with Korea’s largest trading partner could be lessened. Service-related exports to China could increase and the overreliance on the dollar also could be watered down. But if the Chinese economy shakes, so would its currency. The local economy could receive a direct hit.

In the longer run, we should be well prepared for a sweeping change in the international financial order and landscape. The Chinese yuan could one day challenge the dollar hegemony. Currency wars between the two powers could become fiercer. Authorities and companies should draw up contingency plans against the rise of the yuan. Actions should follow the vain words that have been repeated over and over that we should accelerate with the internationalization of the Korean won and make the market as big an Asian financial hub as Hong Kong and Singapore.

JoongAng Ilbo, Oct. 5, Page 30

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