World Economy

Thinner Yuan to Enter SDR

Thinner Yuan to Enter SDR Thinner Yuan to Enter SDR

It looks certain that Chinese currency yuan will enter the International Monetary Fund's benchmark currency basket by November end.

For China, yuan's inclusion will be a big deal and will be a reflection of its political and economic heft. Economists also expect yuan’s inclusion to boost its demand, Reuters reported.

However, reports say that the inclusion will come with a lower weighting than previously expected. This is because the IMF is revamping the currency basket ratios to better reflect financial flows.

According to a Reuters report, IMF policymakers will certainly add the Chinese currency to the Special Drawing Rights basket by end of November.  Beijing had been campaigning for years, seeking the parity of yuan or renminbi with other international currencies such as the dollar, euro, pound sterling and yen.

Reuters report focuses more on the upcoming changes at IMF that will affect the weightage of currencies in the basket, as it is seeking to play down the current emphasis on export volumes and want financial flows to be the key yardstick.

For China, despite its status as the world's largest exporter, there is a lag in financial transactions and the new norm would pinch yuan more and push it to a lower share in the basket. In July, the IMF staff had calculated yuan's weighting to be between 14 to 16%. But the new formula may shrink it towards 10%. Under the revised formula, the euro's share would also fall to 32% while the dollar's ratio would rise to 43.9%.

The currency basket was last reset in 2010, and the current composition is 41.9% dollar; 37.4% euro, 11.3% sterling and 9.4% yen.

“It's barely a two-digit rate, just the minimum rate to be a double-digit one,” an official commented on the proposed share of yuan.

Change in Methodology

On Nov. 30, the IMF's executive board will hold a meeting, where all the 188 members of the fund will deliberate on the composition of the new SDR basket. That day, the board is likely to give the green signal to yuan’s admission.

Capital Economics economist Andrew Kenningham said the change in methodology would affect yuan more as most other countries would continue to maintain past ratios.

“The renminbi is completely different because despite its inclusion in the SDR, it's not really a fully convertible currency and has very thin, much less liquid markets,” he said.

Despite the IMF's SDR admission, the Asia Times , in a report noted that the exchange rate direction vs dollar can swing both ways and basic stability cannot be assured. Though yuan recovered its ground against the dollar recently, it may slip again as the US Fed rate-hike is looming large. The onshore and offshore rates may also diverge.