SDR

SDR

Yuan joins IMF’s elite reserve currency club in a milestone moment for China

The yuan becomes the fifth member of the prestigious SDR basket on Saturday, but more reforms are needed before it is a freely traded currency, say analysts

PUBLISHED : Friday, 30 September, 2016, 7:49pm
UPDATED : Monday, 03 October, 2016, 3:36pm

China’s yuan joins an elite group of reserve currencies created by the International Monetary Fund on Saturday in a move hailed as a milestone in the country’s rise to global financial prominence.

From tomorrow, the yuan, also known as the renminbi, will become the fifth member of the IMF’s prestigious Special Drawing Rights (SDR) basket of currencies, alongside the US dollar, euro, Japanese yen and British pound.

Analysts say it marks the beginning of a new era for the yuan, paving the way for its wider adoption in international trade and bolstering China’s status as a key player in the global financial system.

However, they also say that Beijing would need to carry out more reforms in the years ahead to push the internationalisation of the yuan, as it is now the only SDR reserve currency that cannot be fully traded. International investors still face a lot of restrictions in trading in yuan-denominated bonds and stocks.

[It is] a landmark moment in the renminbi’s journey towards becoming a truly international currency
Peter Wong Tung-shun, chief executive Asia-Pacific, HSBC

Peter Wong Tung-shun, chief executive of the Asia-Pacific region for HSBC, described the inclusion of the yuan in the SDR basket as “a landmark moment in the renminbi’s journey towards becoming a truly international currency.”

The SDR is an international currency reserve created by the IMF in 1969 to promote trade, increase liquidity and supplement member countries’ official reserves during financial crises.

Beijing first started to allow use of the yuan outside the mainland in 2003 when it let Hong Kong banks conduct certain designated business in the currency. In 2009, it started to push the currency harder, permitting international companies and businessmen to settle trade in yuan, and a year later allowing the yuan to be used in investment.

In November last year IMF managing director Christine Lagarde declared that the yuan satisfied the two main criteria for inclusion in the basket, namely that it was “widely used” and “freely usable”. The IMF announced the yuan was to become its fifth reserve currency in December.

“The SDR inclusion now formally catapults it into the ranks of the world’s most important reserve currencies, and will give greater confidence to companies and institutions around the world to settle trade in yuan and invest in yuan-denominated assets,” Wong said.

“Going forward, we believe the Chinese authorities will continue to deliver financial and capital market reforms, gradually opening the door to more cross-border flows, and ensuring that China and the renminbi become increasingly integrated into the global financial system.”

Wong said Hong Kong, as an offshore yuan trading centre and a key financial and asset management market, would play a pivotal role in the internationalisation of the yuan in the future.

China is likely to let the yuan become fully convertible only when its economy recovers
Jasper Lo, King International chief executive

Marc Chandler, global head of currency strategy of Brown Brothers Harriman Investor Services, described the yuan’s induction into the SDR basket as “an acknowledgement of the immense strides China has made since the 1970s, and especially since its entry in to the World Trade Organization in 2001.”

The World Bank last month sold US$700 million in bonds denominated in SDR, the first such issue in more than 30 years.

“In the bigger picture, the role of the yuan as a reserve currency can only go up. The IMF has estimated that the yuan accounts for about 1 per cent of global reserves,” Chandler said.

King International chief executive Jasper Lo believes it may need five years for the yuan to become fully convertible.

He said: “The mainland economy is weak and a fully convertible yuan now would lead to capital outflow. China is likely to let the yuan become fully convertible only when its economy recovers. This may need about five years time.”

On the eve of its including in the SDR basket, the yuan remained weak, trading at 6.6698 per US dollar, down almost 7 per cent in the past year.

This article has been amended to correct the attribution in the pullout quote

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