Further reforms, not inclusion in SDR, key to boosting yuan’s prestige and global appeal

Liberalisation of the yuan will do far more good than simply being part of a basket of currencies from which Special Drawing Rights gain their value

PUBLISHED : Friday, 12 August, 2016, 1:00am
UPDATED : Friday, 12 August, 2016, 1:00am

As bond products go, this is about as obscure as it gets. According to some mainland news reports, the World Bank and China Development Bank plan separately to issue bonds denominated in so-called Special Drawing Rights to be made available on the mainland. What? That may be the response of most people. Why? That would be the question of most professional investors. SDR are monetary units issued by the International Monetary Fund and are held by its member states as part of their currency reserves. Their value is determined by a weighted currency basket composed of the US dollar, the euro, the yen and the British pound. In a major coup for China, the yuan will be included in the basket as early as October.

Many countries have long been critical of the international reserve currency status enjoyed by the US dollar. China is particularly obsessed with having the SDR playing a greater role as a reserve currency to challenge the greenback. It considers inclusion of the yuan in the SDR a boost to the currency’s international status and prestige.

August lift-off: China set for Special Drawing Rights bond issues, report says

Aside from member states using SDR as part of their reserves parked with the IMF, the monetary units have had little use in international trade and investment. However, during the global financial crisis, SDR proved to be useful in helping to boost liquidity for troubled countries. The yuan’s inclusion in the SDR is a big step; having bond products denominated in the yuan-included SDR may also broaden their investment appeal. But at least initially, Chinese state banks are expected to be their most likely investors.

In the last analysis, reforms to the yuan are the only way to make it a major international currency. Significant changes have already been made such as removing the minimum price on lending rates and the ceiling on bank deposit rates. But much more needs to be done in liberalising the interest rate regime and opening capital accounts such as lifting restrictions on capital outflow. These are far more important than SDR inclusion.