UK support for yuan’s SDR inclusion could help China in curbing capital outflows

By Li Qiaoyi Source:Global Times Published: 2015-10-22 23:53:01

Following a joint declaration by China and the UK on Thursday voicing support for the yuan's inclusion in the IMF's reserve currency basket, the Chinese currency has certainly moved closer to membership of the elite money club, which could be of particular importance amid continued capital outflows from China.

Britain supports the inclusion of the yuan in the currency basket for the fund's Special Drawing Rights (SDR), subject to meeting the fund's existing criteria in its forthcoming review, said the declaration, which was issued during the third day of President Xi Jinping's first State visit to the UK.

"Both sides urge members who have yet to ratify the 2010 quota and governance reforms to do so without delay to further enhance the voice of emerging markets and developing countries," Xinhua News Agency reported on Thursday, citing the document.

The UK's support for the yuan's SDR inclusion followed a similar pledge in late September by the US during Xi's State visit to the country, decidedly lifting sentiment toward the Chinese currency.

For the yuan to move closer to reserve-currency status would be of particular significance, given the current concerns about pressure from capital outflows.

Commercial banks in the country posted 729.6 billion yuan ($114.8) in net sales of foreign exchange on behalf of clients in September, according to data released by the State Administration of Foreign Exchange (SAFE) on Thursday. The figure was down from the previous month's 807 billion yuan, but still pointing to capital outflows.

In an attempt to curb abnormal short-term flows of funds, the government is currently studying a raft of measures that include the Tobin tax, Wang Xiaoyi, deputy head of SAFE, told a news conference on Thursday.

Named after the Nobel prize-winning US economist James Tobin, the tax is applied to foreign exchange transactions, and is considered useful in suppressing short-term capital outflows.  

Wang stated that there is no basis for a continued depreciation of the yuan, given the health of the nation's macroeconomic fundamentals, and unreasonable market factors that could lead to increasing depreciation expectations will disappear as the economy stabilizes. 

There are some doubts about whether the Tobin tax would really benefit yuan trading over the long run, as the imposition of the tax would add to the cost of investing in the currency. But if the yuan gains reserve status, it would certainly boost investor confidence in the overall economy and thus naturally reduce speculative capital flows out of the country based on growth concerns.

The author is a reporter with the Global Times.

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