The International Monetary Fund announced the launch of the new Special Drawing Right (SDR) valuation basket on October 1st. This basket now includes the Chinese renminbi as decided upon sometime back in Nov 30,2015 giving Yuan reserve currency status. This means that Yuan is to be a freely usable currency and will be included in the SDR basket as a fifth currency. The basket already includes the U.S. dollar, the euro, Japanese yen, and the British pound.
What this would mean to rest of the world:
The Renminbi’s inclusion reflects the progress made by IMF in pursuing China to reform its monetary, foreign and financial systems. This acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets. With appropriate safeguards, these efforts will bring about a more robust international monetary and financial system. This will in turn support the growth and stability of China and the global economy.
The value of the SDR will be the sum of the values of the following amounts of each currency:
China to devalue Yuan?
The Yuan has already depreciated over 7 percent this year. It has to devalue Yuan furthermore so as to balance their economy. China has a credit fueled growth. Heavy industries and most of the leading sectors are escaping the inflation by exporting their products abroad. China cannot continue to print money and defend the Yuan from massive depreciation at the same time. But for China to fit in with other currencies in the basket, it has to depreciate Yuan.
China took the initiative to depreciate Yuan this year but couldn’t do it to the requisite levels as it was in review period of IMF for SDR. So it just depreciated to levels enough for the economy to hold for the time being. Now that Yuan is in the SDR basket, China need not save face on the depreciation front. It is estimated that the Yuan might be depreciated by another 23 percent to bring stability to the economy.
What this would mean to Bitcoin:
China is the world’s largest economy and is one of the leaders in the exports sector. Even though the Chinese government banned Bitcoin, owing to the corruption issues, Bitcoin investments from china are significant. When the Yuan depreciated, the funds inflow from Chinese investors drove Bitcoin prices high.
This time if we actually see a depreciation of around 23 percent, we can surely expect the cryptocurrency prices to soar high. Will this be the boost Bitcoin has been waiting for to reach $1000 again? This only time can tell.