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Even if it is currently in a weakened state when compared to the dollar, the yuan enters the IMF world currency reserve. This is a very important milestone for China, boosting its economic power and growth.
In accordance with China’s slow-moving markets, due to its investigation of a number of brokerage companies in the past few weeks, the yuan has fallen 0.21%. This made the price reach its lowest point since August 2015, trading at 6.3985 per dollar.
This fall might be increased in the coming weeks, as investors are currently anticipating a dollar hike rate increase starting this December 16th. Only one of the companies that deal directly with the US Federal Reserve has abstained from buying into the belief that rates will suffer a raise preceding the meeting held on Wednesday next week.
The admittance into the International Monetary Fund’s currency reserves has not made the People’s Bank Of China provide a much-needed support, unfortunately. Investors are still on hold when considering an exchange into yuan, with skeptics claiming that the economic value of the currency will still suffer a decrease in the coming months.
This skepticism is not backed by the Chinese central bank, as it claims that the yuan will hold in the near future, with no major fluctuations. Currently, the discrepancy between offshore and onshore banks is around 0.77%, with the latter being at 6.4584 per dollar.
If a major capital move or investment is done in an unnatural fashion next year, the Chinese bank will intervene rapidly in the market in order to resolve whatever problems may arise, thus keeping the currency at a stable level. This claim might make more investors jump into the fray, providing a boost to the yuan.
The IMF has currently set the weight of the yuan at about 10.92%, a fairly large amount below market expectations which were sitting at 14%. This makes it the fourth most powerful currency out of the ones currently in the world currency reserve, alongside the dollar (at 41.73%), the euro (30.93%), the Japanese yen (8.33%) and the British pound (8.09%).
The current market weight of the yuan is expected to rise after its inclusion in the reserve, as more trades will be made by using this currency, due to the fact that it is now considered international. Taking into account that back in 2013, the yuan was seen as more powerful than the euro in trading markets, as well as the doubling of yuan-denominated bonds sold in offshore markets each year, this increase is very likely.
As the Yuan enters the IMF world currency reserve, China will further cement itself as the world’s second largest economic power. The chance that the Chinese currency will eventually overthrow the euro once again, as it once did in 2013, is becoming plausible. But this depends on a large amount of factors, economic or otherwise, including the expected hike in dollar rates.