IMF to Invite Yuan Into SDR Currency Basket

IMF to Invite Yuan Into SDR Currency Basket

Yuk Tao Wong/iStock

Global confidence in the Chinese currency continues to rise.

The International Monetary Fund (imf) is set to include the Chinese yuan in its Special Drawing Rights (sdr) reserve currency on November 30. The yuan has reached the sdr requirement of being “freely usable,” which brings it one step closer to reserve currency status.

Special Drawing Rights are international reserve assets that supplement the official money reserves of member countries, providing extra credit and liquidity to the international market. sdrs are not a currency in and of themselves but can be used to potentially claim the equivalent value of the four currencies currently in the sdr basket: the euro, Japanese yen, pound sterling and U.S. dollar.

The Financial Times said the inclusion of the Chinese yuan may be “like many Chinese financial reforms: significant in hindsight but harder to get excited about in its early stages.” The current value of all sdrs is around $280 billion, and most economists estimate that the yuan’s inclusion will take up around 10 percent of the value of the currency basket. This equates to $28 billion—a small amount compared to the huge volumes traded worldwide.

Mark Boleat, policy chairman at the City of London Corporation, said:

It is an indication that the currency is already very important in the world, and it is going to become more important. So symbolically, it is important, but it is not just a symbol; it is a recognition, and also it will undoubtedly increase the willingness of central banks and others to hold and to deal in renminbi [yuan].

In 2009, amid the West’s scramble for signs of recovery, Zhou Xiaochuan, the governor of the Peoples Bank of China, called for a new financial order with a global reserve currency replacing the U.S. dollar. The Financial Times noted, “If, as expected, the imf this month approves the inclusion of China’s renminbi as a reserve currency, it will mark a small step for Mr. Zhou’s 2009 vision but a big move for the renminbi.”

Since the inclusion of the yuan into the sdr basket has been debated for over a year, Barrons predicts that a positive decision on November 30 will be unlikely to have any immediately significant positive impacts on the yuan. It will be just one more step on the journey of unpegging, revaluing and internationalizing the yuan—making it competition for the previously untouchable U.S. dollar.

Despite this, other analysts predict the inclusion of the yuan will have a large impact over the following few years. Standard Chartered plc predicts the inclusion could spur up to $1 trillion of net purchases of China’s onshore bonds by the end of 2020. axa Investment Managers predict that about 10 percent of the $11.6 trillion of global reserves will flow into yuan assets.

The Trumpet has long predicted that United States economic dominance will inevitably end. To find out the role of currency in this oncoming crisis, read “Deathblow to the Dollar.”