China's SDR inclusion may lead to $500 bln reserve demand for yuan

Mon Oct 26, 2015 12:30pm EDT
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By Jamie McGeever

LONDON Oct 26 (Reuters) - Including the Chinese yuan in the International Monetary Fund's benchmark currency basket would give it an official seal of approval, eventually leading to global demand worth more than $500 billion in coming years, currency analysts say.

Inclusion of the yuan in the holdings of foreign exchange reserve managers would be a gradual process, subject to external factors with high degrees of uncertainty. But the yuan eventually might comprise nearly 5 percent of global reserves.

The IMF's executive board is scheduled to decide in November on the yuan's inclusion and is expected to give the green light, although approval could be early next year, sources familiar with the discussions told Reuters.

Being able to buy and sell the yuan will require further liberalisation of China's exchange-rate controls, a process that has been years in the making and may take many more.

Still, demand for yuan from reserve managers could counter the capital outflows from China. Those outflows have accelerated recently to record levels as the economy has slowed and markets have fallen.

Based on its inclusion in the IMF's Special Drawing Rights (SDR) basket, a virtual currency that values IMF reserves and emergency payouts to members, the yuan's share of the world's FX reserves could eventually reach around 5 percent, analysts estimate.

That would place the yuan, or renminbi, ahead of the Canadian and Australian dollars (each almost 2 percent of reserves, according to the latest IMF data) and near sterling (4.7 percent), but still well behind the euro (20.5 percent).

The U.S. dollar remains the world's pre-eminent reserve currency, accounting for nearly two-thirds of all holdings.   Continued...