SDR inclusion a bonus, but reform more important for yuan internationalization

By Hu Weijia Source:Global Times Published: 2015-11-30 23:53:01

The IMF was due to announce its decision on whether or not the yuan would be included in its Special Drawing Rights (SDR) currency basket on November 30, although the decision had not been announced by press time. But even if, as expected, the yuan is included, it will not necessarily expand market demand for yuan-denominated assets. China still has a long way to go in boosting the internationalization of the yuan.

Some observers have said that SDR inclusion could be as important as China's entry into the WTO, as it would also mark a new era for China. But there should not be excessive expectations in this regard, given that the SDR is not widely used by nations as a foreign exchange reserve asset.

Currently the SDR only accounts for about 2.5 percent of the total global reserves. So SDR inclusion is unlikely to substantially increase the proportion of the yuan in global reserves.

A decision by the IMF to include the yuan in its SDR basket would be an acknowledgement from the organization that the yuan has become freely tradable and convertible. However, this will not necessarily influence other central banks' decisions about their foreign exchange reserve assets.

According to media reports, use of the Japanese yen as a reserve asset has actually fallen since it was included in the SDR basket. What really affects central banks' choices about reserve currencies are factors such as the level of acceptance among global investors for a certain currency, rather than SDR basket membership. So even though SDR inclusion could be an important step in boosting the internationalization of the yuan, further financial reforms are still essential for it to become a global currency.

China has made progress in recent years in deepening financial reforms by developing its offshore market and further liberalizing the exchange rate. In October, China's central bank issued offshore yuan-denominated bonds in London, marking the nation's first issuance of yuan-denominated bonds outside China. These efforts are helping the yuan to meet the criteria for being included in the SDR basket, but there are concerns that China may slow down the process of financial reforms once the yuan gains SDR status.

However, these concerns are unnecessary. According to a proposal unveiled early in November by the Communist Party of China (CPC) Central Committee, China will gradually make the yuan convertible under the capital account and will further expand the investment quota for foreign institutional investors to participate in China's domestic financial market. This suggests that Chinese leaders have a clear understanding that it will be hard for the yuan to become a global reserve currency unless there are further financial reforms.

The key factor for encouraging the internationalization of the yuan is continuing financial reforms, rather than being included in the SDR basket. There is expected to be increasing global demand for the yuan in the future, and this will in turn promote financial reforms in the country.

The author is a reporter with the Global Times.

Posted in: It's Your Business

blog comments powered by Disqus