Chinese yuan still far from being a global currency despite inclusion in IMF’s SDR basket

Chinese yuan will formally join the Special Drawing Rights basket of the International Monetary Fund on Saturday, becoming the fifth SDR reserve currency.

Seen as a milestone in Beijing’s push for yuan’s internationalisation, the move will be a catalyst for central banks and funds around the world to shift funds into yuan, which in turn will promote its use worldwide.

However, to China’s disappointment, global use of the currency actually declined in the past year amid lingering concerns over depreciation. Analysts say SDR status won’t give the yuan an immediate boost because Beijing’s tougher controls on capital flows and a lack of transparency in monetary policies are still dampening global investor confidence in the currency.

“It’s a positive sign and a good start, but it won’t make a big difference in terms of demand for the yuan and its liquidity,” said Heng Koon How, a senior foreign exchange strategist at Credit Suisse in Singapore.

“SDR is only a small part of global central bank reserve assets, the amount is relatively moderate and it’s not very liquid,” he added.

The direct demand for yuan asset allocation in the IMF, BIS, the World Bank and other funds around the world that track SDR is expected to be over US$10 billion, according to Dai Daohua, a senior economist at the Bank of China (Hong Kong), citing figures from the People’s Bank of China.