YUAN IN SDR - LONG WAY TO GO...

By Ruma Dubey

While we were taken over by the border tensions and then RBI, China has quietly taken its place in history. If one may recollect, last year, in November 2015, the IMF announced that it was including the Chinese currency in the SDR basket. And that has finally happened. Starting 1^st Oct, the yuan is officially in the SDR basket.

For most of us here in India, SDR probably means Strategic Debt Restructuring as we are caught up in that cycle. But on a global scale, which has more relevance, SDR stands for Special Drawing Right. This is like a reserve maintained by the IMF and its value – which currency to hold, in what percentage, is decided by the IMF. It reviews this basket and its composition of international currencies, once in every five years.  This is a virtual currency, something which it knows it can draw upon if needed to its members and countries.

The choice of adding a currency to SDR has happened for the first time since its formation in 1999 and before adding the yuan there were only four currencies – dollar, pound, yen and the euro. The IMF adds a currency based on two things – it needs to be a major exporter in the world market and its currency should be free, easily usable in international trade. So with the yuan now in that basket, what it means is that the yuan is now internationalized and more importantly, it is recognition of Yuan’s rising status, along with China in the arena of global finance.

Post this inclusion, the IMF has notified the new weightage of the currencies in SDR.

• U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
• Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
• Chinese renminbi 10.92 percent
• Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
• Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

This means that Yuan at 10.92% is valued much higher than the Japanese and the British currency.

Many argue that it is a politically motivated decision, very symbolic, to include Yuan and that too after much lobbying. But what is significant is that Yuan was considered to be relevant enough to be there. Acceptance in the SDR means that Yuan should have a demand, like the other currencies and the liquidity. And for that to happen, China will have to now work really hard on how it boosts demand for its currency. For a currency which is in the tight grip of the Govt and where doors to its financial system are not wide open, doing this will be a big task. With no policy transparency and no faith of any data which comes out, how can one use yuan as a preferred international currency?

Yes, the Yuan inclusion could see around $30-40 billion foreign demand for yuan denominated assets. But whether it will lead to structural changes and bring about transparency; that’s a tall order. The Yuan is not even fully convertible, so what SDR status are we really talking about? This was all about a prestige issue, of getting the Yuan into the SDR - it’s there now but it seems doubtful that China will toe the line when it comes to loosening financial regulations. Thus as most analysts around the world say – It was all about getting into the SDR, that’s it! There is a 0% chance of Yuan becoming a true reserve currency anywhere in the next three years.