The country’s currency, the Chinese yuan (officially the Renminbi), is also starting to mature. The most recent evidence of this? The IMF’s decision to include the yuan as a part of its SDR international reserve asset, a basket of major world currencies:
The Yuan’s Wild Ride So Far
Since being on the world stage, the yuan has been all over the place. It’s been pegged to the U.S. dollar, unpegged, and then temporarily re-pegged again during the Financial Crisis.
Most recently, the currency was devalued sharply in 2015 to make up for slowing GDP growth. Today, it sits at six-year lows against the U.S. dollar.
The PBOC and the Chinese Yuan
In September 2016, for example, the country increased overnight borrowing rates and bought up the yuan in large amounts to counteract shorting from international traders.
The Fix Is In
The Dragon’s Gambit
But in other cases, China has different priorities, such as protecting the value of the yuan during times of international uncertainty. It can help to do this by securing the yuan with surprise gold holdings announcements or by dumping massive amounts of U.S. Treasuries to prop up the yuan’s price.
Sometimes these divergent strategies appear to be operating in the same week. Who’s in charge? International currency traders ultimately don’t know how these decisions are made, or who is making them.
The Golden Hoard That Wasn’t
The Dragon Sleeps
But the U.S. greenback and other top currencies have a huge advantage: people think they know what they are worth. The value isn’t set by government apparatchik.
For now, the Chinese yuan remains a sleeping dragon. If China ever really joins the global market in a meaningful way, watch the currency wake up and breathe fire.