Yuan to join major currencies in SDR

26 October, AtoZForex.com, Lagos – China’s long term bid for inclusion in the Special Drawing Rights may be becoming a reality as representatives of the International Monetary Fund have given China strong signals of the likelihood of finally joining the group of currencies, as clarified in a Bloomberg report.

Special Drawing Rights

The Special Drawing Rights basket currently comprises of the U.S. dollar, euro, yen and the British pound, with the possibility of the Yuan to join major currencies in this group. The IMF is preparing to conduct its twice-a-decade review of the SDR. The Yuan’s new status as the fourth most use currency may help strengthen China’s case as it has been pushing for inclusion in the SDR. The successful addition of China’s currency could trigger as much as $1 trillion of inflows into the currency, according to a Standard Chartered Plc estimate. Although it is not technically a currency, the SDR gives IMF member countries who hold it the right to obtain any of the currencies in the basket (the dollar, euro, yen and pound) to meet balance-of-payments needs. Therefore making the ability to convert SDRs into yuan on demand crucial. The current value is based based on weighted rates for the four currencies.

USD, euro and British pound still tops

The dollar, euro and British pound remain the top three currencies, with the share of payment volumes at 45 percent, 27 percent and 8.5 percent, respectively, with the Yuan recently surpassing the Yen as the fourth most used currency. Another triumpth for the Yuan is the fact that earlier this year, it had become the most-active currency for payments to China and Hong Kong in Asia, according to Swift.

Some IMF staff have pointed that the yuan trails other currencies in metrics the fund tracks in determining the SDR basket. Some of the key indicators considered includes:

  • the share a currency makes up of official reserves,
  • international banking liabilities
  • global debt securities,
  • use in foreign-exchange markets.

Support for the Yuan

However, many major economies like the U.S., Germany and U.K., have publicized that they prepared to back the yuan’s inclusion if it meets the IMF criteria.

“Once the Chinese yuan becomes part of the SDR, central-bank reserve managers and institutional investors will automatically want to accumulate yuan-denominated assets,” Hua Jingdong, vice president and treasurer at IFC, said in an interview in Lima earlier this month during the IMF and World Bank annual meetings. “It will be strategically important for China to welcome all kinds of issuers to become regular issuers in China’s onshore market.”

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