The IMF Confirms Yuan Inclusion In SDR Basket At 10.92% Weight, Above JPY And GBP

Submitted by Tyler Durden on 11/30/2015 12:03 -0500

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IMF staff earlier this month proposed that the yuan be added to the basket of currencies used to value the SDR, a reserve asset created by the institution in 1969, and today that decision is confirmed (as expected). The IMF’s Executive Board decision today means that the yuan will be included in the SDR basket from Oct. 1, 2016, effectively anointing the yuan as a major reserve currency and represents recognition that the yuan’s status is rising along with China’s place in global finance.

The IMF reviews the composition of the basket every five years. The fund rejected the yuan for inclusion during the last review, in 2010, saying the currency didn’t meet the necessary criteria. But now...

• *IMF APPROVES ADDING YUAN TO RESERVE-CURRENCY BASKET
• *IMF SAYS YUAN TO JOIN SDR BASKET EFFECTIVE OCT. 1, 2016
• *IMF SAYS YUAN MEETS `FREELY USABLE' STANDARD
• *IMF STATEMENT DOESN'T SPECIFY WEIGHTING OF YUAN IN SDR BASKET
• *IMF SAYS CHINA IS EXPECTED TO HELP FACILITATE USE OF SDR
• *LAGARDE: ADDING YUAN RECOGNIZES CHINA'S PROGRESS ON REFORMS
• *LAGARDE SAYS CHINA TO IMPLEMENT MORE FINANCIAL REFORMS
• *IMF: YUAN TRADING UP SIGNIFICANTLY IN 2 OF 3 MAJOR TIME ZONES

Reuters then reports,

• CHINA'S RENMINBI TO HAVE WEIGHTING OF 10.92 PCT IN IMF'S BENCHMARK SDR CURRENCY BASKET

Which is less than the 14-16% expectation (but nationalistically greater than Japan's Yen and Britain's Pound)...

However, as politically-motivated as this decision may have been, now comes the hard part for China.

The inclusion puts new pressure on Beijing to change everything from how it manages the yuan, also known as renminbi, to how it communicates with investors and the world. China’s pledges to loosen its tight grip on the currency’s value and open its financial system will come under new scrutiny.

As The Wall Street Journal reports, “The actual inclusion of the yuan in the SDR is a nonevent for most investors. The sound you’ll hear is a collective yawn,” said David Loevinger, a managing director at fund manager TCW in Los Angeles and a former U.S. Treasury official focusing on China. “The lack of data and policy transparency remains a risk for investors.”

While IMF inclusion is largely symbolic, it could open Beijing to criticism of its financial policies when the fund conducts its five-year review of the currencies in its basket. Formally, inclusion would add the yuan to the IMF’s special drawing rights, or SDRs, a virtual currency IMF uses for emergency lending to its members and countries can use to bolster their reserves.

In the near term, inclusion would lead to a modest, less-than-$30 billion in new foreign demand for yuan-denominated assets, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences.

“Domestically, it’s far from certain whether the SDR status could force other, structural overhauls,” Mr. Zhang said.