Chinese Yuan Assumes Reserve Currency Status

By Luke Spajic

In a quiet but significant marker for China, the yuan has become a reserve currency: On 1 October, the International Monetary Fund (IMF) officially included the yuan in the currency basket for its Special Drawing Rights, alongside the U.S. dollar, euro, yen and British pound.

The IMF’s decision to include the yuan last November made headlines and came in the midst of a tumultuous year for the currency and for China’s financial markets. Relative calm has returned in recent months: The yuan has continued to depreciate against major currencies but in a more gradual and orderly way than the sudden devaluations in August 2015 and early 2016. And China’s stock market has largely recovered from its steep plunge early this year.

Indeed, despite the bumpy road over the past year, the promise held out by the IMF’s decision is gradually being realized: China’s presence in global capital markets is increasing. Earlier this year, China announced that it would open the interbank bond market to foreign investors much sooner than expected. Chinese equities appear to be on track for inclusion in MSCI’s widely used emerging market equity index over the next year or two. And now that the currency has achieved reserve status, the yuan is likely to be used more widely in international transactions going forward.

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OUTLOOK FOR CHINA
Looking at the year ahead, we expect the current trend to continue: more progress on financial market reform amid slowing growth and continued depreciation in the yuan. Our base case calls for GDP growth of about 6.4% in 2016 and 5.75%–6.25% in 2017, and a gradual decline in the yuan versus the U.S. dollar over the next 12 months.

At that point, China will take center stage again with the 19th National Congress of the Communist Party in the autumn of 2017. Held once every five years, the National Congress next year is likely to have a profound impact on power, personnel and policy in China.

For more on PIMCO’s outlook for China and the emerging markets, read A Constructive Case for Emerging Markets.

Luke Spajic is PIMCO’s head of emerging markets portfolio management for Asia.

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