Chinese Yuan Inclusion in SDR

Today is a big day for International Monetary Fund (IMF) and China, as former’s board of governors are scheduled to meet today and take a decision on staff recommendation, whether to include Yuan in IMF’s Special Drawing Right (SDR) basket or not.

The IMF’s executive board is expected to agree to include the yuan, also known as the renminbi, in its Special Drawing Rights basket.

The IMF said the yuan met “all existing criteria” and will become part of the SDR basket in October 2016. It confers a measure of global legitimacy to China’s currency as the government starts to liberalize its rigidly controlled exchange rate and financial system.

Officials altered the mechanism by which the yuan is fixed against the U.S. dollar to make its movements more responsive to market forces.

The admission of the Chinese currency into the world’s foreign exchange reserve basket is hugely symbolic for the yuan, but strategists are not confident that central bank reserve managers will rush to top up their yuan holdings in response.

It wrote in an update on China last week that the yuan was expected to see widespread adoption as a reserve currency globally. Since 2009, China has signed currency swap agreements with central banks in Britain, Brazil, Canada, Indonesia, South Korea and other countries.

By allowing an emerging-market currency into the SDR basket for the first time, the International Monetary Fund showed its willingness and ability to adapt to global economic reality.

She emphasized that it is a work in progress, and that the International Monetary Fund will continue to monitor all criteria and compliance from all five authorities whose currencies are represented in the basket. The yuan’s addition is “an endorsement as an global currency”, said Chen Kang, chief bond analyst for SWS Research Co.in Shanghai. Branches of Chinese state-owned banks in Britain, Australia, Germany, Switzerland, Russia, France and Singapore have received authorization to take deposits or settle trade-related transactions in yuan.

“After the inclusion to SDR, RMB can be used for settlements among central banks”.

But Chinese policy advisers have always been divided, sometimes publicly, on how far China should go in opening up its borders to foreign capital; while few use vocabulary that rejects general reform principles, many domestic policy advisors – including some otherwise supportive of economic liberalisation – warn throwing open the gates to cross-border flows would be destabilising.

In August, trading volume grew 4 times year-on-year to an absolute maximum and amounted to 18 billion yuan (191 bln rubles – $2.8 bln).