China upgrades renminbi. Importance of dollar eroded. 11 currencies added to basket of 13

China strengthens currency basket.



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China is not only emerging as a mass producer of quality goods, it plans to dominate the financial markets too. This is part of its policy to make the Yuan more relevant to the world economies.

The latest declaration states that the value of Yuan is likely to emerge stronger in the new scheme of things. The value of the Yuan currently depends on a few currencies. But, the Chinese planners will double the currencies that contribute to its value.

It hopes that this will cause a dent in the role of the dollar worldwide as a benchmark currency. This move aims to expand the horizon of the foreign exchange to impact the reference rate of the Yuan.

As a result, the renminbi will perk up the Yuan to stand up to the dollar. It will also indicate a state of stability in the Yuan.

The position of the United States Dollar and the comparative value of the Chinese Yuan will not remain the same. The Yuan will appear stronger than what it currently does.

Thus, the prominent placement of the U.S. Dollar will be lower at 22.4% as against the current position at 26.4%. Presently, as against the current standing of the US dollar at 26.4, the Euro stands at 16.34%.

The Chinese Foreign Trade System under which the basket is managed comprises of 13 present currencies at present. New currencies that are being added are 11 and the consequent basket will erode the dollar’s value.

The following are the currencies being added:
1. Polish Zloty,
2. Turkish Lira,
3. South Korean Won,
4. Hungarian Forint, and
5. South African Rand.

United States dollar will see its prominence dented by the newcomers, with its share falling from 26.4 percent to 22.4 percent. It is followed by the euro at 16.34 percent.

It is a smart move by the Central bank of China and the representation of the enhanced basket will be wider. It comes into effect from the 1st January 2017.

Christy Tan, of National Australia Bank Ltd., informed from Hong Kong that the influence of the dollar on the basket will be reduced. The factors which prompted this move are:

1. Sudden rise in the value of the dollar,
2. Likely hike of interest rates by the US.

Consequently, the health of the economy of China was facing uncertainties. Moreover, huge outflows of capital were a major cause of concern.

However, the health of the Yuan is quite sound as against the other components of the basket. It even saw some rise in the recent past.

The financial circles will see a resurgent renminbi encompassing strength and projecting stability.

That is why the International monetary fund welcomed it and included it in their elite list of currency baskets.
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Umrao Singh
Written for: Lars-Magnus Carlsson
Saturday, 31 December 2016