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Mon, 26th June 2017

Anirudh Sethi Report

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Archives of “special drawing rights” Tag

Yuan falling out of favor in global trade

Overseas use of the yuan for trade and other payments has fallen dramatically as government efforts to stem capital outflows sideline Chinese President Xi Jinping’s ambition to take the currency global.

Yuan trade settlement had surged after Beijing first allowed it in 2009, with the proportion of Chinese cross-border trade settled in the currency peaking at 27% in 2015. But its share fell to 19% in 2016, marking the first year-on-year decline, and slumped further to 14% in January through March of this year. Excluding trade with Hong Kong, where the yuan is often used, would likely push the figure even lower.

 The decline is not limited to trade. Cross-border yuan settlements in Shanghai totaled 441.3 billion yuan ($63.9 billion) in the January-March quarter, down 23% from a year earlier, data from the People’s Bank of China shows. This figure encompasses trade as well as other payments ranging from capital transactions to costs for studying abroad. Settlements have fallen by more than half on a quarterly basis since July-September 2015, when they reached 1 trillion yuan.

The yuan was used for just 1.8% of international payments in March, ranking sixth behind the U.S. dollar, euro, pound, yen and Canadian dollar, according to the Society for Worldwide Interbank Financial Transactions, or SWIFT. The Chinese currency had placed fourth in August 2015 with a 2.8% share, overtaking the yen.

Overseas yuan holdings are shrinking as well. In Hong Kong, the largest yuan hub outside mainland China, yuan deposits hit a six-year low of 507.2 billion yuan at the end of March. This represents a drop of nearly half from 1 trillion yuan in December 2014.

This trend stems mainly from stepped-up capital controls. The Chinese government has gradually imposed stricter curbs since 2015, aiming to rein in outflows and the ensuing softening of the yuan. A measure implemented last November made advance approval necessary for currency conversions or overseas transfers — including in yuan — exceeding $5 million.

IMF First China Foreign Currency Report Puts Reserves at $10.8Trln

Yuan banknotes and US dollars are seen on a table in Yichang, central China's Hubei province on August 14, 2015Prior to Friday’s report, IMF currency data was limited to the US dollar, euro, Japanese yen, UK pound sterling, Australian dollar, Canadian dollar and Swiss franc, and an indistinguishable category of “other currencies.”

“With the separate identification of reserves in RMB [Renminbi], eight currencies are now distinguished,” the IMF publication stated.

Chinese holdings of US dollars were $5.1 trillion at the end of 2016, compared with $10.8 trillion in total foreign currency reserves, the report explained.

The remainder was divided among other currencies, with euro holdings the largest at $1.6 trillion, according to the IMF.

Former IMF Chief Sent To Jail As Spain Prosecutes 65 Elite Bankers In Enormous Corruption Scandal

In many other countries, excluding the United States, corrupt bankers are often brought to task by their respective governments. The most recent example of a corrupt banker being held accountable comes out of Spain, in which the former head of the International Monetary Fund (IMF), Rodrigo Rato was sentenced to four years and six months behind bars.

According to the AFP, Spain’s National Court, which deals with corruption and financial crime cases, said he had been found guilty of embezzlement when he headed up Caja Madrid and Bankia, at a time when both groups were having difficulties.

Rato, who is tied to a slew of other allegations was convicted and sentenced for misusing €12m between 2003 and 2012 — sometimes splashing out at the height of Spain’s economic crisis, according to the AFP.

Yuan’s swift fall fans currency tensions

The yuan is becoming a destabilizing factor in the foreign exchange market amid renewed speculation that China’s authorities would tolerate a weaker currency to support the economy.

The Chinese currency has been depreciating at a faster pace since the end of the National Day holiday period in early October, spurring speculation that it could even hit 7 to the dollar. The trend could throw the market into turmoil by triggering a devaluation war with other Asian currencies. 

 The Chinese authorities sought to hold the yuan’s depreciation in check during a recent string of high-profile events, such as the Group of 20 summit in Hangzhou. The International Monetary Fund also added the yuan to the basket of currencies that make up its Special Drawing Right. 

But now that things are quieter, the yuan has weakened sharply, hitting 6.7 to the dollar.

As the market eyes a possible rate hike in the U.S., the dollar is looking firm. On the other hand, China’s economic slowdown remains a worry. Under the circumstances, there is a growing view that the authorities are inclined to let the yuan fall.

Citigroup predicts the yuan could fall to 7, or even further, against the dollar in 2018. The U.S. bank is not alone: A majority of currency market players expect the yuan to decline against the dollar in the medium to long run.

Sluggish exports

The yuan has tended to move in the same direction as the dollar. When the dollar appreciated through last year, the Chinese currency also strengthened. As a result, the yuan gained value against the euro as well as the yen and other Asian currencies, eating into China’s export competitiveness.

When the dollar began to weaken this year, the yuan followed and depreciated against the yen and other currencies. Keen to avoid a more serious slowdown in the Chinese economy, the U.S. tolerated these trends.

Recently, however, the yuan’s depreciation has accelerated while the dollar appears to have bottomed out. Chinese authorities, evidently, are OK with this.

India- Forex reserves off record high, slump $4 bn to $367.64 bn

After touching a record high, the country’s foreign exchange reserves declined by a whopping USD 4.343 billion to USD 367.646 billion in the week to October 7, the Reserve Bank said today.

The decline was on account of a substantial fall in foreign currency assets (FCAs), a major component of the overall reserves.

In the previous week ended September 30, the reserves had surged USD 1.223 billion to reach a life-time high of USD 371.99 billion.

In the reporting week, foreign currency reserves dipped by USD 4.316 billion to USD 342.394 billion.

FCAs, expressed in US dollar terms, include the effect of appreciation/depreciation of non-US currencies such as the euro, pound and the yen held in the reserves.

Gold reserves remained steady at USD 21.406 billion, the apex bank said.

The special drawing rights with the International Monetary Fund declined by USD 10.4 million to USD 1.476 billion, while India’s reserve position with the Fund dipped by USD 16.5 million to USD 2.369 billion, the apex bank said.

China’s yuan sinks to six-year low, then erases losses

China’s yuan fell to its lowest level in six years early Monday, breaching a key psychological threshold, before erasing the losses on the first day of trading after a week-long holiday.

Traders said the weakening of the yuan reflected strength in the dollar last week, and they did not see any signs of intervention by state banks to support the yuan after it fell.

 In mid-July, when the yuan last breached the 6.7 mark, state banks intervened heavily.

Some China watchers have wondered if any signs of yuan weakness following the holiday would signal that Beijing was putting the currency back on a slow depreciation path after holding it steady through September.

The currency fell after the People’s Bank of China set the midpoint at 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

India’s Forex reserves at all time high at USD 372 billion = Market cap of Facebook

Forex reserves rose by USD 1.2 billion to USD 372 billion, an all-time high, during the week-ended 30 September 2016. Forex reserves crossed USD 370 billion thrice during the month of September.

Foreign currency assets, the largest component of forex reserves, rose by USD 1.5 billion to USD 346.7 billion, a record high, during the week-ended 30 September 2016.

On the other hand, three components of forex reserves declined during the week-ended 30 September 2016. Gold reserves declined by USD 236.4 million to touch USD 21.4 billion. Special drawing rights (SDR) fell by USD 3.3 million to USD 1.5 billion. India’s reserve position at IMF dipped by USD 5 million to USD 2.4 billion.

IMF Special Drawing Right basket gives Yuan a 10.92% weighting

First time the Yuan has been included..

The IMF has announced the weightings for currencies in it’s SDR basket of currencies.  This is the first time the Yuan has been included in the basket. 
Per the IMF website:
“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.”
They go on:
“The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.”

ECB and China extend currency swap deal

The European Central Bank and its Chinese counterpart have agreed to extend an existing currency swap line between the euro and the renminbi first set up in 2013.

In a deal which will further cement the renminbi’s bid to become an international currency, the swap line has a maximum size of Rmb350bn and €45bn – the same conditions as that first set up three years ago and will be extended for another three years.

The ECB said the swap arrangement “serves as a backstop facility to address potential sudden and temporary disruptions in the renminbi market due to liquidity shortages in euro area banks”, adding:

Liquidity providing arrangements contribute to global financial stability. The arrangement with the PBC is a recognition of the rapidly growing bilateral trade and investment between the euro area and China.

As part of its bid to become a global reserve, the renminbi will be included in the International Monetary Fund’s Special Drawing Rights basket from October 1.

China is the EU’s second largest global trade partner behind the US.

India’s foreign reserve hits record high at $367.76 bn

The country’s forex reserves increased by USD 989.5 million to an all-time high of USD 367.76 billion on the back of a healthy increase in core currency assets, the Reserve Bank said on Friday.
The total reserves had declined marginally by USD 392.6 million to USD 366.77 billion in the previous reporting week. The reserves had touched an all-time high of USD 367.16 billion previously.
Foreign currency assets (FCAs), a major component of the overall reserves, swelled by USD 952.2 million to USD 342.23 billion for the week ended September 2, RBI said on Friday.
FCAs, expressed in dollar terms, include the effect of appreciation/depreciation of non-US currencies such as euro, pound and yen held in the reserves. Gold reserves rose USD 58.1 million to USD 21.64 billion at the end of the reporting week, it said.
The country’s special drawing rights with IMF fell USD 8 million to USD 1.48 billion while the reserve position in IMF was down by USD 12.8 million to USD 2.39 billion, RBI said.