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Yuan’s SDR status may fuel won’s volatility

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강한나

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15.11.18

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Local analysts forecast Wednesday that the Chinese yuan’s inclusion in the IMF’s reserve-currency basket could significantly affect Korea’s capital market.

They said if the special drawing rights reserve-currency status is bestowed on the yuan it could increase the level of volatility in the domestic financial market.

“Ahead of the U.S. rate-setting in December, the local market should look at whether or not the yuan is included in the SDR currency basket later this month,” said Yuanta Securities Korea analyst Park Se-jin.

He noted that the issue would have a great effect on Korean currency and equities, saying that its impact on the local market may be similar to the U.S. Federal Reserve’s likelihood of a base rate hike, slated for Dec. 15-16.

Wallets with images of the yuan and dollar banknotes are displayed at a store in Beijing. (Bloomberg)

By inclusion in the SDR a currency is acknowledged as a foreign exchange reserve asset on the global stage like the U.S. dollar.

Some other analysts as well as Kim raised the possibility that the Korean won would face greater volatility against the greenback when the IMF approves it.

On Nov. 30, the IMF’s board is scheduled to endorse whether to add the yuan to the basket of key currencies comprising the IMF’s lending instrument -- the dollar, euro, British pound and Japanese yen.

“The yuan’s entry in the SDR basket could raise the volatility of the local currency market, and could cause the won’s weakness,” said an official of the Bank of Korea.

Some local analysts also say that the renminbi will face weakness on a short-term basis, which would affect Asian neighbors including the Korean won as a synchronized effect.

They forecast that China’s monetary authority will be pressured to refrain from intervention in its capital market, which will be linked to easier capital flows for global investors.

But the BOK official predicted that “on a long-term basis, Korea could see its currency gain as the yuan is expected to gradually appreciate with its acknowledgement as an international currency.”

Yuanta’s Park also said that the renminbi's SDR status could ultimately be favorable to the local market.

Global investment banks share the view that the IMF’s possible inclusion of the Chinese currency in SDR basket is more than just political and economic prestige.

They project that it would uplift the Asian superpower’s role in the international economy at a time when the country is trying to challenge U.S’. political and economic dominance worldwide.

The People’s Bank of China said it will continue to overhaul its financial system and open its markets in an orderly way.

By Kim Yon-se (kys@heraldcorp.com)

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