New | Yuan's SDR inclusion could do harm to China
For the yuan to be accepted as a reserve currency, the country will lose export competitiveness and risk falling into deflation as unit strengthens
Beijing may be pressing for the yuan to be included in the special drawing rights, the International Monetary Fund's unit of account, but that would also trigger major demand for the currency that could have adverse impact on China's other economic interests.
The country's export competitiveness would be eroded if the yuan was to appreciate anew against the currencies of other major economies. This could be particularly problematic when ultra-accommodative monetary policy elsewhere, such as in the euro zone and Japan, has already seen a marked appreciation of the yuan against the euro and the yen.
A stronger yuan also lowers China's imports bill and would only add to the central bank's concerns about the risk of deflation in the country.
"Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," said People's Bank of China governor Zhou Xiaochuan on March 29.
Zhou's concerns are well grounded. With global food prices, a key component in China's inflation index, having fallen again last month, according to the United Nations' Food and Agriculture Organisation, a stronger yuan, by making food imports even cheaper, would only heighten the risk of imported deflation.
There is also the possibility that dollar-denominated energy prices might again prove a source of deflation if a framework agreement between Iran and six world powers ultimately results in an increased supply of Iranian oil and gas, an imported deflationary impulse that would only be exacerbated by a rising yuan.