Chinese Yuan all set to join the SDR Basket – BBH

FXStreet (Delhi) – Research Team at BBH, notes that after the markets had closed for the week, IMF’s Lagarde announced that the staff has concluded that China meets the requirements to join the Special Drawing Right basket.

Key Quotes

“Not only do they judge the yuan to be “freely usable”, but also that China has “addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July.”

“Assuming that this is the case, there are two immediate issues. First, currencies in the SDR are assigned a weight. What will be the yuan’s weight? Many observers who have addressed this issue anticipate that the yuan’s initial weight will be something more than the yen’s 9.4% share and around sterling’s 11.3% weight. The risk seems to be on the downside.”

“The weighting is determined by the size of a country’s exports and the use as a reserve asset. The first consideration would appear to give China a high share given that it is the world’s largest exporter. However, an important caveat is that Hong Kong, a part of China it refers to as a Special Administrative Region, takes in around 15% of China’s exports, which are not really exports under the traditional definition. As a reserve asset, China’s share is well below even the Canadian and Australian dollars, let alone the yen and sterling. The IMF estimates that it is around 1%.”

“The second issue involves the reaction by investors and reserve managers. Recall that the new SDR basket will not be launched until September 2016. The yen’s inclusion in the SDR has not made the Japanese currency a major reserve currency or an important international currency.”

“Foreign investors tend to hold a low share of Japanese equities, and their Japanese government bond holdings are well below benchmark indices. Inclusion in the SDR is not the necessary and sufficient condition to attract asset and reserve managers. The continued opening up of China’s financial markets and greater transparency are the keys. We argue that the real value of joining the SDR lies in the acknowledgment that China is one of the great financial powers.”

Research Team at BBH, notes that after the markets had closed for the week, IMF’s Lagarde announced that the staff has concluded that China meets the requirements to join the Special Drawing Right basket.

(Market News Provided by FXstreet)