More cross-border fund flows needed to maintain momentum of yuan’s internationalisation
Shenzhen stock connect and a fund recognition scheme that works needed in wake of yuan’s inclusion in International Monetary Fund reserve currency basket
The yuan’s inclusion in the International Monetary Fund’s reserve currency basket is a major step forward for the currency, but there’s still a long way to go before it becomes a real international currency.
It was big news last week when the IMF decided to add the yuan into the Special Drawing Rights(SDR) basket from October next year, putting it alongside the US dollar, euro, yen and pound. Hong Kong’s stock market celebrated the news by rising two days in a row.
After the celebrations, however, we have to face the reality that the has a lot to do to catch up with other major currencies.
On the trade settlement side, the yuan is now the fourth-most-used currency, according to Swift, but the percentage is only 2.79 per cent. The top three comprise the US dollar, with 42 per cent, euro 30 per cent and pound 9 per cent.
The IMF set the yuan’s weighting in the SDR basket at 10.92 per cent, below market expectations of 14 per cent. That compares with the US dollar’s new weighting of 41.73 per cent, the euro’s 30.93 per cent, the yen’s 8.33 per cent and the pound’s 8.09 per cent.
SDR inclusion means IMF fund managers will have to rebalance their portfolio. But it should be noted that the total size of SDR basket stood at only US$280 billion. The rebalancing means IMF fund managers will only have to buy about US$30 billion worth of yuan, which is not much.