This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
On Monday, the Chinese yuan joined one of the most elite clubs on the planet: the International Monetary Fund’s Special Drawing Rights basket of reserve currencies.
Scheduled to take effect next October, the yuan will be weighted at 10.92% – greater than fellow basket members the Japanese yen and the British pound, but less than the euro and the U.S. dollar.
CURRENCY | OLD WEIGHT | NEW WEIGHT |
U.S. Dollar | 41.90% | 41.73% |
Euro | 37.40% | 30.93% |
Chinese Yuan | – | 10.92% |
Japanese Yen | 9.40% | 8.33% |
Pound Sterling | 11.30% | 8.09% |
*Source: IMF
Earlier this year on Aug. 4, the IMF said China would have to move ahead with market liberalization before it would allow the yuan in. The currency’s inclusion this week shows the organization is happy with China’s progress. IMF Managing Director Christine Lagarde said the yuan’s inclusion was based on “a clear indication of the reforms” China has carried out.
“The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy,” Lagarde said in Monday’s statement.
Of course, the IMF could be dead wrong.
“From a practical position, the IMF expects China will have to make its currency more ‘freely tradable’ than it is – which, along with being a ‘major exporter,’ is the other criteria the IMF considers in conferring reserve status on a currency,” Money Morning Capital Wave Strategist Shah Gilani said on Monday. “But there’s a possibility the IMF jumped the gun on this.”
Dark horizons lay ahead if the Chinese yuan isn’t stable enough to deserve its new global reserve status…
The Chinese Yuan Is a Dangerous Wild Card
“If China lets the yuan adjust to other major currencies by purely market forces, which none of the other reserve currency countries – the U.S., Great Britain, the European Monetary Union, and Japan do – the IMF may get a shock it’s not prepared for. And I mean a major shock,” Gilani said.
We all saw what happened in August.People’s Daily, the Communist party’s mouthpiece, declared Aug. 24 “Black Monday.” The Shanghai Composite closed down 8.5% that day – the benchmark index’s worst single-day fall in eight years.
The pain radiated outward from there.
The Nikkei index in Japan slipped 4.6% to its lowest level since February. The UK’s FTSE dropped 4.7% in its worst one-day performance since 2009. The Stoxx Europe 600 closed more than 5.3%, while Germany’s DAX was down 4.7%. And the Dow Jones fell more than 1,000 points in the opening minutes of trading.
China’s crash extended beyond stocks, too – emerging-market currencies tumbled; oil hit a six-and-a-half-year low.
The proximate cause for all of it was the country’s surprise devaluation of the yuan on Aug. 11. By month’s end, more than $5 trillion had been wiped off global stock prices.
“If China’s economic miracle goes through a meltdown, the Chinese yuan will collapse on the open market. The IMF, with not only egg on its face but also a global banking crisis to deal with, will prove it’s nothing but a relic of a bygone era of U.S. hegemony in the free world’s political and economic past.”
To get full access to all Money Morning content, click here
About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.
Disclaimer: © 2015 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.
The post Chinese Yuan Could Give the IMF “a Shock It Isn’t Prepared For” appeared first on Money Morning – We Make Investing Profitable.