On Oct. 1, the Chinese yuan officially became a member of the IMF basket of global reserve currencies — known as Special Drawing Rights (SDR) — weighted third in the basket.
The yuan has now become one of the strongest currencies on the global market. The smooth transition of China’s economy has taken the world by surprise, while the subsequent fillip this has given to the New Taiwan dollar deserves further examination.
Three months prior to the IMF officially announcing the yuan’s inclusion in the currency basket on Nov. 30 last year, the People’s Bank of China implemented a strategic adjustment of the yuan’s exchange rate. This significantly relaxed restrictions on exchange rate fluctuations and scrapped its policy of pegging China’s currency against the US dollar in favor of linking it to the SDR as a test for the full internationalization of the yuan. This caused international vulture funds to short-sell the yuan in expectation of the currency’s depreciation.
EXTERNAL FACTORS
However, one year after China’s reform of the yuan exchange rate, several external factors have helped shore up the value of the yuan so that it has not only bottomed out, but also begun to rebound, which is contrary to the bet of vulture capitalists.
For two years now, the pace of growth in China’s economy has been slowing, but beginning in the third quarter, there have been signals that things are easing up, and there are even signs of a recovery.
Comparing the sharp rise in housing market prices in Chinese first and second-tier cities over the past six months with the international situation, the improving property values indicate that confidence in the exchange rate is returning and that indicators are stabilizing, and that is probably a good thing.
Looking at China’s “One Belt, One Road” strategy, with the vast majority of its direct investment in the development of infrastructure and “smart cities” along the inland silk road, an appreciating yuan is an advantage that brings momentum. The strategy of investing in energy and natural resources along the marine silk road and replacing the petrodollar with the petroyuan is based on the view that a rising yuan is a strategic advantage.
NEW CHALLENGE
That is why it is becoming clearer that the yuan is rebounding following its inclusion in the IMF basket. However, this is posing a new challenge to Taiwan’s economy, as it is likely to strengthen the cross-strait currency link effect.
The very first week following the yuan’s inclusion in the currency basket, the US Department of the Treasury announced that both the yuan and the NT dollar would be kept on the department’s currency manipulator watch list, officially named the “Foreign Exchange Policies of Major Trading Partners of the United States.”
The stated reason for doing so was that the two nations have large foreign reserves exceeding the IMF regulation requiring that reserves be kept within a margin of plus or minus-2 percent of GDP. China’s foreign reserves are 29 percent of its GDP, while in Taiwan it stands at an astonishing 81.5 percent of the nation’s GDP.
For the foreseeable future, the exchange rate of the NT dollar will appreciate together with the yuan. Having to deal with the pressures of an appreciating currency at a time when the economy is already under both international and domestic pressure will pose a great risk for Taiwan’s economy.
Bert Lim is president of the World Economics Society.
Translated by Edward Jones and Perry Svensson
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