Thursday, October 29, 2015

IMF Set to Green Light Adding Yuan to SDR Basket - What's the Impact?

This a story we have been following here for quite some time. Last December we noted that inclusion of the yuan into the SDR currency basket was an event to watch for in terms of monetary system change. With that event now seemingly close at hand, below are links to a couple of articles that discuss the coming change and its potential impact globally.


IMF set for green light on China's yuan joining currency basket

"International Monetary Fund staff are set to give the all-clear for China's yuan to be included in the lender's benchmark currency basket, laying the groundwork for a favorable decision by policymakers, people familiar with the discussions said.
The IMF's executive board is scheduled to decide in November on putting the yuan on a par with the dollar, yen, euro and pound sterling and a key factor will be its performance against a checklist of technical criteria, as assessed by IMF staff.
Three people briefed on the IMF discussions, who asked not to be named because of the sensitivity of the issue, said on Oct. 25 a draft report from staff reached a favorable conclusion on including the yuan, also known as the renminbi (RMB)."
. . . . . . 
"An IMF spokesman said staff were finalizing a report to be considered at a formal board meeting planned for November, although no date had yet been set.
"The decision on the possible inclusion of the RMB in the SDR basket will ultimately be made by the IMF's Executive Board when the meeting is held," he said.
The second official said that may be postponed until early 2016. Any change to the basket will take effect in October 2016."

. . . . . .
What happens if the yuan is included?
Let’s assume that the yuan does make it into the SDR, becoming its fifth component (replacing another currency is in theory possible, but highly unlikely). The demand generated strictly by trade in SDRs won’t be anything to write home about, but the IMF stamp of approval comes with side benefits.

Standard Chartered plc (ADR: 
SCBFF ) has estimated that over CNY 6 trillion ($945 billion) in offshore deposits could flow into the country by 2020, while renminbi invoicing for merchandise trade could reach $2.6 trillion per year. The bank estimates that the offshore renminbi market has grown 21-fold since 2010. AXA Investment Managers forecasts a migration into yuan-denominated reserves of over $1 trillion.
My added comments:
This event will be a significant event that signals change the the world monetary system. However, by itself this event is not likely to create a condition where the average person would notice any significant change in their daily life in the short term. It is just another step in a slow global move away from the US dollar as the sole major global reserve currency. Also, the very slow process of making this change illustrates how changes tend to happen slowly over time rather than suddenly absent any major financial crisis.

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