JP Morgan economist Haibin Zhu said yuan holdings might rise to 5 percent of global reserves, or about $350 billion, over five years.
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HONG KONG, Dec 1 The International Monetary Fund’s decision to add China’s yuan to its reserves basket is a triumph for Beijing, but the fund’s verdict that the currency met its “freely usable” test will have little financial impact unless Beijing recruits more users. The yuan will have about an 11 percent weighting in the SDR.
Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound.
Still, it is a symbolic victory for Beijing, which has spared no efforts to strengthen the worldwide role of the yuan – also called the renminbi (RMB) – and its acceptance as a reserve currency. The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies in the SDR basket.
This inclusion of the yuan will be in effect from October 1st 2016 and is the 1st change in the currency composition of the SDR since 1999. In August, China devalued the renminbi, which shook global markets.
“The Executive Board’s decision to include the RMB in the SDR [special drawing rights] basket is an important milestone in the integration of the Chinese economy into the global financial system”, Lagarde said.
The International Monetary Fund’s recognition of China’s currency is a step toward encouraging its global use, but banks will remain reluctant to hold yuan unless Beijing pushes deeper financial reforms, analysts say.
Now only the United States dollar, the yen and the pound are in the group.
China’s central bank welcomed the decision.
The internationalization of a country’s currency usually involves three phrases: being used as an worldwide trade settlement currency, turning into an investment currency, being treated as a reserve currency.
“Central banks, like other risk-adverse asset managers, invest the bulk of their funds in currencies which are fully convertible and for which there are deep and liquid markets for foreign exchange, bonds and derivatives”, he said.
The global reserve currency status, however, will not automatically turn the yuan into a major global reserve currency, which is a choice of the market. They tend to be very conservative and would adjust their portfolio in a very gradual manner.
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“Markets in China have yet to evolve further in terms of breadth, depth and institutions”, said a foreign central banker, speaking on condition of anonymity, saying he expects any increase in the offshore yuan pool to happen slowly. “So it’s very important to keep China on path of reform”.
