The yuan will be added to the IMF’s basket of currencies used to value the SDR in October 2016, with a weighting on 10.92%, which effectively anoints the yuan (also called the renminbi) as a major reserve currency. What are the long-term implications of this? Read on.
The commentary above & below consists of edited excerpts from an article* by Tyler Durden (zerohedge.com).
The weighting of 10.9% 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 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 Bloomberg details, there are 4 critical points…
- SDR status doesn’t require central banks to hold yuan but could be a catalyst for portfolio reallocation.
- Reserve managers for countries having strong trade and funding ties with China have the strongest incentive to increase yuan holdings.
- Re-allocations by central banks may be gradual to minimize disadvantageous market pricing.
- Re-allocations by private investors will be constrained until capital controls are lifted and transparency improves.
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The above article* was written by Tyler Durden (zerohedge.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – register here) in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]