Renminbi Shock

Following gross domestic products in world second place, China caught up with Japan in international currency. International Monetary Fund qualified Chinese renminbi in the basket of five major currencies on Monday, starting next October. China won the third place, following U.S. dollar and Euro, in the share of special drawing rights, an accounting unit of IMF. It is a great emerge of China in international monetary market, leaving the Japanese a sense of underdog.

SDR is reserved asset created by IMF in 1969, which was distributed to member countries in proportion to each amount of investment and convertible to major currencies. In addition to U.S. dollar, Euro, British pound and Japanese yen, Chinese renminbi was included to those elite currencies. With advance of renminbi, the share of Japanese Yen was located in the fourth position leaving U.K. pound with the smallest share.

Newspapers analyzed the influence of renminbi. Mainichi Shimbun elaborated that China had started its attempt to join the world major currencies when it experienced great amount of unrealized loss in U.S. governmental bonds soon after the Lehman Shock in 2008. With independence from U.S. dollar, China expected to protect Chinese companies from possible economic sanction of closing their dollar accounts.

Strategy was to get support from European nations. Chinese President, Xi Jinping, announced that Chine would issue governmental bond on renminbi in London market. For City, it was a good news to revitalize its market with new financial instruments. In turn, U.K. supported renminbi’s participation to international major currency basket. Other European countries are also increasing settlement in renminbi.

However, various regulation exists on Chinese currency. Under the control of Chinese Communist Party, Chinese government strictly prohibits taking renminbi out of the country. Foreign exchange market sets narrow range for fluctuation laid by People’s Bank of China every morning. “There’s a still a lot of work to be done,” said the head of IMF, Christine Lagarde, urging further reform to China.

The Japanese tried to calm down. “Although renminbi’s participation to the major currency had symbolic meaning,” said Chief Cabinet Secretary, Yoshihide Suga, in his press conference, “we do not expect direct influence on international capital transactions that are mainly done by private entities.” But, this is the consecutive advance of China in international monetary market, following the establishment of Asia Infrastructure Investment Bank. Japanese retailers are introducing various method of settlement in Chinese currency. It is the Japanese who closely realize growing influence of renminbi.