The yuan took on the mantle of a global reserve currency Saturday, a milestone that is seen breathing life into China’s bond markets by prompting estimated inflows of as much as $1 trillion over the next five years.
The currency’s entry into the International Monetary Fund’s Special Drawing Rights –alongside the dollar, euro, pound and the yen”•comes amid China’s efforts to boost its international usage and ambitions of providing an alternative to the dollar. Describing the inclusion as a “historic milestone,” IMF Managing Director Christine Lagarde said in a statement Friday that it reflects the progress that the Asian country has made in reforming its financial systems and liberalizing markets.
“SDR entry will pave the way for closer interaction between China’s capital market and that of the rest of the world,” Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore, said on Saturday. “The first impact will be on the yuan, which the authorities are likely to keep stable for the next few weeks as any sudden volatility spike will damp the yuan’s image.”
While an IMF statement Friday said the yuan has been deemed freely usable, China has been suspected of meddling in the foreign-exchange market after a shock devaluation in August last year rattled investor confidence. It has been seen intervening heavily even offshore”•driving yuan interbank rates to more than 20 percent in Hong Kong”•and clamping down on capital flows. The median estimate in a Bloomberg survey is for the Chinese currency to decline 1.1 percent in the rest of this year to 6.75 a dollar.
The yuan’s addition is the first change to the SDR basket since 1999, when the euro replaced the deutsche mark and the French franc. The new weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 10.92 percent for the yuan, 8.33 percent for the yen and 8.09 percent for the British pound. There were 204.1 billion SDRs allocated to IMF members as of March, equivalent to around $285 billion, compared with about $11 trillion of global reserves.
The basket, created in 1969, gives IMF member countries who hold it the potential right to obtain any of the currencies in the basket to meet balance-of-payments needs. Inclusion could be a catalyst for central banks and sovereign wealth funds to shift funds into the yuan. The Chinese currency constituted 1.1 percent of official reserves in the latest IMF survey, compared with 63.7 percent for the dollar.
