Basket Case
The Chinese yuan is expected to be added to the IMF’s special drawing rights (SDR) basket on Nov. 30, based on the organization’s Nov. 13 report in favor of the inclusion.
Experts predict that the measure will have a rather limited short-term effect on the Korean financial market. “The SDR basket consists of the currencies of the United States, the United Kingdom, Japan and the eurozone,” said the Hana Institute of Finance, continuing, “The Chinese currency is estimated to have a weighted value of 10 percent or so in the early stage of its addition, and its impact on the domestic financial market is likely to be limited in the short term.”
The Bank of Korea added that the change will have a positive effect on the Korean economy by stabilizing the value of the yuan over time. The Hyundai Research Institute echoed by saying, “With Korea and China in a currency swap agreement of 360 billion yuan [US$56.5 billion] since April 2009, an improved international status of the RMB can contribute to Korea’s soundness on the foreign exchange side.”
Some others are rather pessimistic about the matter, though, as Korea’s risks can increase, with international credit rating agencies such as Moody’s having picked Korea as one of the countries that are the most vulnerable to the slowdown of the Chinese economy. Economics professor Kim Jeong-shik at Yonsei University warned of the possibility of additional yuan devaluation. “At present, the Chinese government is maintaining a stable exchange rate in order to add the RMB to the SDR basket,” he remarked, continuing, “However, it can devalue the currency again whenever the growth of the Chinese economy slows down, and then Korean exporting firms can be affected.” He added that China is currently pursuing the internationalization of the yuan while regulating capital movements, which is antinomic. “A financial turmoil in a state where yuan-based international transactions are commonplace could be a staggering blow to the Korean financial market,” he stressed.