Yuan expected to get low SDR weighting

Mainland unit likely to be included in basket after IMF chief's backing

PUBLISHED : Sunday, 29 November, 2015, 10:35pm
UPDATED : Sunday, 29 November, 2015, 10:35pm

The yuan is expected to be a shoo-in for the International Monetary Fund's reserve currency basket after its managing director Christine Lagarde's public endorsement of the currency, but its inclusion may come with a lower weighting.

Speculation is mounting on the calculation metrics of a yuan inclusion as the IMF readies to review the composition of the special drawing rights basket this week.

The SDR, an account unit of the IMF, is rarely used in daily financial transactions. Currently made up of the US dollar (a weighting of 41.9 per cent), euro (37.4), pound (11.3) and yen (9.4), its membership in the elite currency club is seen as an acknowledgement of China's political and economic heft.

In an August report by the IMF, the yuan was estimated to have a weighting of between 14 and 16 out of 100, based on the existing methodology, which is skewed towards the share of exports by the currency's issuing country.

However, over the past few weeks, the IMF has dropped hints the formula is being revised and that the actual weighting may be about 10 per cent.

"To some extent, it's anybody's guess what the weight would be," said Andy Seaman, the chief investment officer at London-based Stratton Street.

He estimates the yuan to get a weighting of 10 per cent. In 2012, Stratton forecast the yuan to have a 10.5 per cent weighting in the forthcoming review, surpassing the yen (8.4), pound (10.1) and trailing the euro (33.4) and dollar (37.6).

Other than the share in global exports - a requirement the yuan already met at the time of the last review in 2010 - another facet being considered is whether a currency is "freely usable".

"Concerns over how freely usable and convertible the [yuan] is will likely bring down the weighting to low double-digits," said Alex Wolf, an emerging markets economist at Standard Life Investments. "Additionally, the markets for [yuan] forex products and bonds are still relatively thin and illiquid, which would be a factor in addressing its weighting.

"Ten is the share the market has priced in. Any upward or downward surprise could provoke fluctuation in the exchange rates."

Becky Liu, a senior Asia rates strategist at Standard Chartered Bank, said the possibility of the share to be in high single digit could not be ruled out, depending on how many new barometers were introduced.

"In general, export is the biggest factor. The more non-export factors are being taken into account, the lower weighting yuan will have in the SDR," she said.

Still, the People’s Bank of China is unlikely to make a fuss over the weighting, as the primary goal is to get the foot in the door in the current review, said Marc Chandler, senior vice president for foreign exchange at Brown Brothers Harriman, the oldest private bank in America.

“Since August, the PBOC has been putting on a full-court press to try to get in. They won’t be too worried about the weighting. There will be an implicit understanding between Beijing and the IMF that markets liberalisation has to continue.

“So China would have done more reforms by 2020 when the basket is reviewed again and can get a big share.”

He estimated the yuan to have an initial 5 to 7 share, due to the ambiguity in mainland China’s exports to Hong Kong, as well as in the so-called offshore yuan market in the city.

“The CNH in Hong Kong is a fiction. It is created by China and is not a real thing. Because the authorities’ explicit capping on the money flow so that the yuan in Hong Kong isn’t fungible with that in mainland China.”