Chinese Yuan’s Inclusion To IMF’s SDR Basket Could Draw $1 Trillion

Around $1 trillion in global currency reserves will switch into Chinese assets should the International Monetary Fund (IMF) endorse the yuan as a reserve currency and include it in its Special Drawing Rights (SDR) basket this year, according to Standard Chartered, Bloomberg reports.

“SDR inclusion in 2015 would likely have a significant market impact, driving an immediate sharp increase in global diversification into renminbi assets,” Standard Chartered analysts Becky Liu and Eddie Cheung wrote in a research report published on Friday.

Officials from China’s Central Bank, the People’s Bank of China (PBOC), have called on the IMF to include the yuan in its reserve basket, and an inclusion could bring as much as 6.2 trillion yuan ($999 billion) of net purchases of China’s onshore bonds by end-2020, Standard Chartered estimates.

Around 10 percent of the $11.6 trillion of global reserves will flow into yuan assets if this was to take place, AXA Investment Managers told Bloomberg, without giving a timeframe.

For over five years, Chinese Central Bank Governor Zhou Xiaochuan has pushed for the yuan to be included into the SDR basket, a move that would aid China’s attempts to diminish the dollar’s dominance in global trade and finance.

The IMF created the SDR basket back in 1969 to support the Bretton Woods system of fixed exchange rates after supplies of gold and dollars proved inadequate. Owning SDRs gives countries a claim to the four currencies in the basket: the dollar, euro, yen, and UK pound.

The composition of the SDR basket is reviewed every five years. In 2010, the IMF decided that the yuan could not be added due to the fact it wasn’t “freely usable” at the time.

However China has made a recent push to make the yuan more freely usable, in order to be considered for included in the SDR basket, PBOC Governor Zhou said in Washington on April 18.

“The renminbi broadly meets SDR criteria,” Standard Chartered analysts Becky Liu and Eddie Cheung wrote in the report. “Even if the decision to include the renminbi is deferred, we see a high degree of certainty for inclusion in 2020, or possibly earlier via an interim review.”

China’s yuan has recently emerged as one of the world’s top five payment currencies, overtaking the Canadian dollar and the Australian dollar, according to global transaction services organization SWIFT (The Society for Worldwide Interbank Financial Telecommunication).

“What is significant is the seal of approval by the IMF that the yuan has internationalized as a reserve currency,” Aidan Yao, senior emerging market economist at AXA Investment, told Bloomberg on Thursday. “It could trigger a reallocation of global reserves portfolios.”

Currently, the U.S. dollar has a 41.9 percent weighting in the SDR basket, with the euro holding a 37.4 percent weighting, according to the IMF’s website. The pound accounts for 11.3 percent and the yen accounts for 9.4 percent.

If included into the SDR basket, the Chinese yuan could have a potential weighting of around 13 percent, according to an estimate by Bank of America Merrill Lynch in March. HSBC believes that the yuan’s share could be around 14 percent, reflecting China’s importance in global exports, according to a report published in April.

In March, China announced that its long-awaited global payment system to process cross-border yuan transactions was ready and could launch as early as September.

The launch of the China International Payment System (CIPS) will pave the way for further internationalizing the yuan and should greatly increase global usage of the Chinese currency by cutting transaction costs and processing times.

CIPS, will be a global payments superhighway for the yuan and will replace an assortment of networks that make processing renminbi payments a more cumbersome process.

CIPS will allow for companies outside of China to clear yuan transactions with their Chinese counterparts directly, thus reducing the number of stages that a payment needs to go through.

Standard Chartered said the Chinese currency has a 60 percent chance of getting reserve status this year.