The Chinese renminbi has been included in the International Monetary Fund’s Special Drawing Rights (SDR) basket, meaning that the currency will be “freely useable” from 1 October 2016.
The IMF executive board confirmed the renminbi’s inclusion in its SDR basket yesterday, following a recommendation by IMF managing director Christine Lagarde to incorporate it as a fifth currency last month.
In a statement issued by the IMF, Ms Lagarde said the renminbi’s inclusion is a “milestone” in the integration of the Chinese economy into the current global financial system.
“It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” Ms Lagarde said.
“The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
Nikko Asset Management chief global strategist, interest rates and currencies Roger Bridges said the inclusion reinforces the importance of China’s ongoing reform agenda.
“Going forward… [for China] to realise the benefits [of the inclusion], they will have to open up their capital account and basically reform the whole capital controls they have at the present time,” Mr Bridges told InvestorDaily.
Mr Bridges argued that the weighting given to the renminbi – 10.92 per cent – and changes made to the weighting of other currencies is also significant.
Namely, the euro declined from 30.93 per cent of the SDR basket to 37.40 per cent. The pound also fell from 11.30 per cent to 8.09 per cent.
Mr Bridges pointed out that the euro’s re-weighting accounts for 60 per cent of the total movement, with the pound accounting for another 30 per cent. He said this signifies that the European crisis “mucked-up” the continent's chance to act as a second reserve currency.
According to HSBC Global Research the weight of the US dollar only reduced to 41.73 per cent from 41.90 per cent.
Mr Bridges said this marks the dominance of the US dollar: “It signifies that the US dollar is still all powerful and hasn’t changed and that’s not likely to change in probably the near term or even the medium term.”
AllianceBernstein (AB) managing director of Asia Pacific fixed income Hayden Briscoe said the renminbi's inclusion is “symbolic” and could lead to inflows into China of up to US$40 billion.
“This represents a significant portfolio rebalancing for global bond and equities investors which will have far-reaching effects on China’s capital markets and economy, as well as financial markets and currencies elsewhere,” Mr Briscoe said.
Mr Bridges also noted that investors will now need to re-evaluate their investment in Chinese assets.
“The development of the yuan is going to be an important one for people’s portfolios and [investors should] start looking to China’s assets,” he said.