Sept 29, 2016
What Now for
China as Renminbi Joins SDR?
Since being admitted to the IMF’s elite currency club,
Beijing has prioritized GDP growth over structural reforms.
The renminbi will join the International Monetary Fund’s (IMF)
Special Drawing Rights (SDR) basket this Saturday, 1
October, which is also China’s National Day. So the day will
be double-happiness for China.
For the world, the renminbi’s entry to the SDR basket seems
to be much to do about nothing, with only a symbolic impact
on both the global and Chinese economy. Even with the third
largest weighting (10.92%) in the basket, just behind the
USD’s 41.73% and the euro’s 30.93% (see chart), the renminbi
remains an indirect, and a tiny, part (0.27%) of global
As we argued recently, additional central bank demand for
renminbi to benchmark their reserve portfolios to the SDR
basket weightings is small. There are about 204 billion SDRs
outstanding, equivalent to about USD285 billion, compared
with USD11.6 trillion of global reserves. Assuming global
central banks will increase their aggregate holding of
renminbi to match its 10.92% weighting in the SDR basket,
additional demand for the Chinese yuan will amount to USD31
billion, which is a drop in the ocean of global
BNP Paribas Investment Partners’ senior economist Chi Lo
After all, global central banks have had a year, since the
IMF’s Board decision last November on including the renminbi,
to adjust their portfolios to accommodate the renminbi in
the SDR basket. This means that the bulk of central bank
buying renminbi should have happened already. But these
central bank inflows have hardly made a dent in China’s
financial account, which is still bleeding red, although
capital outflows have slowed down sharply (see table).
SDR inclusion of the renminbi is not relevant to the
portfolio rebalancing decision (to increase the weighting of
renminbi-denominated assets) of international investors. The
impact on global portfolio decisions will come from foreign
investors’ assessment of China’s fundamental outlook
, the opening of China’s capital account and the decision by
international index providers, such as MSCI, to include
Chinese A-shares in their global indices.
From a reform perspective, the renminbi’s SDR status
confirms the recognition by the international community of
China’s economic ascendency and structural reform efforts.
This should act as an external force and a confidence
booster for China to push for more reforms. However, it
seems that this strategic importance has faded as Beijing
has downgraded the priority of structural reforms since the
IMF Board decision last year in exchange for upgrading GDP
growth as the top policy priority.
In other words, Beijing seems to have taken the attainment
of the SDR status as a sign that its role as a force to push
structural reforms has been completed. So the collateral
benefit of being a SDR currency to China’s reform process
has greatly diminished.
This attitude raises the risk of reform complacency. But
this does not necessarily mean that China’s structural
reforms will stall post-SDR entry. New reform efforts, such
as the expansion of the renminbi offshore market and further
opening up of the onshore capital market by expanding the
investment quotas and stock connect schemes, will likely
proceed faster than other deep-rooted changes, such as SOE
and banking reforms.
Finally, the SDR status will facilitate China’s effort to
internationalise the renminbi. So it will be more
widely-used in international payments going forward. But
until some major tasks of structural reforms are done to
improve the domestic system, the renminbi will remain a
thinly-used reserve currency.
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