The IMF Confirms Yuan Inclusion In SDR Basket At 10.92% Weight, Above JPY And GBP

Tyler Durden's picture

IMF staff earlier this month proposed that the yuan be added to the basket of currencies used to value the SDR, a reserve asset created by the institution in 1969, and today that decision is confirmed (as expected). The IMF’s Executive Board decision today means that the yuan will be included in the SDR basket from Oct. 1, 2016, effectively anointing the yuan as a major reserve currency and represents recognition that the yuan’s status is rising along with China’s place in global finance.

The IMF reviews the composition of the basket every five years. The fund rejected the yuan for inclusion during the last review, in 2010, saying the currency didn’t meet the necessary criteria. But now...

  • *IMF APPROVES ADDING YUAN TO RESERVE-CURRENCY BASKET
  • *IMF SAYS YUAN TO JOIN SDR BASKET EFFECTIVE OCT. 1, 2016
  • *IMF SAYS YUAN MEETS `FREELY USABLE' STANDARD
  • *IMF STATEMENT DOESN'T SPECIFY WEIGHTING OF YUAN IN SDR BASKET
  • *IMF SAYS CHINA IS EXPECTED TO HELP FACILITATE USE OF SDR
  • *LAGARDE: ADDING YUAN RECOGNIZES CHINA'S PROGRESS ON REFORMS
  • *LAGARDE SAYS CHINA TO IMPLEMENT MORE FINANCIAL REFORMS
  • *IMF: YUAN TRADING UP SIGNIFICANTLY IN 2 OF 3 MAJOR TIME ZONES

Reuters then reports,

  • CHINA'S RENMINBI TO HAVE WEIGHTING OF 10.92 PCT IN IMF'S BENCHMARK SDR CURRENCY BASKET

Which 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, also known as renminbi, 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 The Wall Street Journal reports, “The actual inclusion of the yuan in the SDR is a nonevent for most investors. The sound you’ll hear is a collective yawn,” said David Loevinger, a managing director at fund manager TCW in Los Angeles and a former U.S. Treasury official focusing on China. “The lack of data and policy transparency remains a risk for investors.”

While IMF inclusion is largely symbolic, it could open Beijing to criticism of its financial policies when the fund conducts its five-year review of the currencies in its basket. Formally, inclusion would add the yuan to the IMF’s special drawing rights, or SDRs, a virtual currency IMF uses for emergency lending to its members and countries can use to bolster their reserves.

 

In the near term, inclusion would lead to a modest, less-than-$30 billion in new foreign demand for yuan-denominated assets, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences.

 

“Domestically, it’s far from certain whether the SDR status could force other, structural overhauls,” Mr. Zhang said.

It has been a long path...

But, 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.
  • Reallocations by central banks may be gradual to minimize disadvantageous market pricing.
  • Reallocations by private investors will be constrained until capital controls are lifted and transparency improves.

*  *  *

As we detailed earlier...
Note that there is already some notable divergences between actual reserve holdings and SDR weightings...

And Yuan's addition may increase downward pressure on the dollar...

SDR weights since 1978 have been based on a country’s relative share in reserve holdings by monetary authorities and the value of exports of goods and services. Preliminary estimates in August from the IMF put the yuan share of the SDR basket in a range between 14% and 16% depending on whether the yuan would be added as a fifth currency or replace an existing currency. Based on the latest available data, the euro appears likely to lose the largest ground in the IMF’s new SDR basket.

 

The weights of the SDR basket create no formal obligation on the part of the IMF’s 188 members to hold a similar proportion of international reserves. Indeed, the IMF’s Currency Composition of Official Foreign Exchange Reserves report -- a confidential survey on the composition of central bank reserve holdings -- indicates a preference, in aggregate, to hold a much larger share of the dollar and pound.

 

Suggested 15% weighting - which The IMF has not released yet

 

The reduction in dollar portfolio allocations from the IMF’s recognition of the yuan as a reserve currency may prove larger over time than the change in the SDR basket would suggest. Dollar allocations may face greater downward pressure simply because they are so large relative to other currencies -- more than three times the size of euro holdings, for example. Part of this disparity is valuation, a reflection that the dollar is trading at a 12-year high against the euro. The dollar has increased 21% in trade-weighted terms over the last five years, according to Bank for International Settlements’ calculations of nominal effective exchange rates.

However, as Bloomberg concludes, the ability (and risks) are near-term constraints on any major re-allocations.

The willingness to hold more yuan and less dollars is one thing; the ability to execute is quite another. At the moment, the ability of private foreign investors to increase their yuan allocation is limited by China’s capital controls. There are special arrangements for foreign central banks that give them enhanced access to China’s foreign exchange and interbank bond markets.

 

Another hurdle for expanding yuan holdings is the perception of a lack of transparency and market manipulation by the Chinese authorities. Until access and perceptions change, these factors will slow the flow into the yuan. The depth and security of U.S. government bonds may also constrain switches out of dollar assets.

 

Central banks tend to adjust reserve allocations slowly, so as not to pit market pricing against them. This suggests a steady gradual stream of demand for yuan assets over time. Until portfolio rebalancing is complete, dollar rallies may be short-lived as these may be seen as attractive opportunities for investors in both the public and private domain to trim dollar exposure.

As finally, before everyone gets too excited - The history of yen internationalization offers a cautionary tale on hopes for the yuan.

Japan’s experience suggests that a floating exchange rate, free cross-border flows and stable economic growth are all necessary for successful internationalization. The challenge for China will be hitting all three of those criteria.

 

 

Currency internationalization comes in three stages. The first is use in trade settlement and financial transactions. Second is providing a safe asset for investment by non-residents. Third is to serve as an anchor for the regional and -- ultimately -- global market. In the 1980s and 1990s, the yen made rapid progress from stage one to stage two. Since then, it has stalled and even started to retrace its steps in some respects.

Of course, Wall Street analysts are already getting excited, here are their initial reactions when The IMF hinted it was going to happen...

HSBC:

  • SDR inclusion would encourage China to stick to much- needed financial and capital-account liberalization, Paul Mackel, HK-based head of global research, writes in note dated Nov. 14
  • USD/CNH moved above 6.4000 on Friday, which could suggest that more flexibility on yuan is coming
  • Market players will want to see more volatility in the currency eventually; hence, inclusion in SDR doesn’t necessary mean that the RMB will be stronger
  • Knee-jerk reaction for yuan to strengthen should be temporary; will be interesting to see if PBOC decides to become more hands-off

Commerzbank:

  • China needs to show commitment to further opening up its capital account and accelerate domestic financial reforms, led by interest-rate liberalization, Zhou Hao, Singapore-based senior economist, writes in email
  • Country needs to improve policy transparency to attract global investors; that would build trust between global investors and Chinese authorities
  • PBOC should reduce frequency of intervention, allowing market forces to play a critical role
  • China should provide more hedging options to corporates and financial institutions, so they can prepare for greater financial-market volatility

Huabao Trust:

  • China stepped up rates liberalization in run-up to SDR inclusion; now it may increase pace of financial reform, Nie Wen, Shanghai-based economist, says in phone interview
  • Onshore-offshore yuan spread is expected to narrow in coming days
  • PBOC’s monetary policy stance will still be the most important element for investors to gauge regarding the yuan’s trading direction
  • A more market-oriented system is crucial for Chinese capital markets; a “reasonable” pricing of domestic assets will reduce systemic risk

Maybank:

  • Inclusion will largely be a symbolic move because slowing economy and capital-outflow pressures may delay FX reforms, Fiona Lim, senior FX analyst, says in phone interview
  • SDR inclusion will improve “rationality” in investment and assets allocation, which will improve financial stability

SocGen:

  • Any positive reaction on yuan’s possible inclusion in IMF reserves to be short-term, given that the outcome was well priced in, says Jason Daw, head of Asia currency strategy at Societe Generale SA in Singapore.
  • Being added to SDR unlikely to speed up the pace of reserve diversification into Chinese assets, Daw says in Nov. 14 e- mail interview
  • “We continue to see an upward bias to USD/CNY over the coming months and expect it to reach 6.80 by mid-2016.”

* * *

It would be most ironic, however, if China achieves its ultimate objective, which is simply to find foreign buyers for its currency as an offset to domestic outflows, which in turn sends the Yuan soaring beyond its pre-devaluation levels, thereby slamming the Chinese economy even further and assuring that the unfolding Chinese hard landing becomes a full-blown global crash.

Finally we could not help but see the irony in the fact that today The IMF accepts the Yuan into the 'free market' currency basket just a day after what appeared to be a huge intervention in the offshore Yuan market...

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Dubaibanker's picture

Congratulations China!! (for being the first developing country to be included into the global IMF SDR).

Soul Glow's picture

What are you calling the rest of the countries?

Un-developing?

;)

freewolf7's picture

Can't come soon enough.

Death to the petro dollar, and all it supports.

Veriton's picture

George Soros' vision of a China-owned NWO has taken another big step. Congratulations to the globalists! George Soros and the China-fronted NWO

Neil Patrick Harris's picture

At least its a step forward for world peace. The West is less likely to have war with the East now that China has joined the Ponzi alliance.

dlmaniac's picture

How many times has China devalued their currency this year alone? Those who saved in RMB were robbed each time. It's just another paper currency as dubious as US$, if not more so. Chinese politicans are every bit of as arrogant, imcompetent and clueless as the American counterparts, folks. The myth around China is fooling less and less people.

cheka's picture

more top tier bonds to leverage off of.  remember all that talk of shortage of US treasury bond collateral?  fixed it

are there any currency war idiots left?  same team, no stronger proof

rickards owes millions of lemmings refunds

JRobby's picture

Another step closer for the NWO

If you want to keep your Special Drawing Rights, you can keep your Special Drawing Rights.

Oh? there will be no money. But on your death bed you will receive "total conciousness"

Now fetch my bag peasant!

thesonandheir's picture

Should be a great day when the US no longer has to run deficits as the worlds reserve currency.

Max Steel's picture

Deficits with no industrial backbone *

BanksterSlayer's picture

Next Up: China introduces the Gold-Backed Trade Note and the US is forced to reveal a poker hand completely empty of gold bars.

Thank you, Jim Willie, for being right AGAIN.

pods's picture

I am genuinely curious about this idea of a sovereign introducing anything gold backed.

The world has been in competitive devaluation mode for 7 years running. Why would any of them slit their own throat by limiting their power to devalue.

Throughout history, gold was money because it was scarce, durable, blah blah blah.  

Now govenments found something more valuable.  Your labor.

They would never artificially limit themselves by backing anything with gold (if it was exchangeable).

Where am I wrong?  Aren't all trade positive nations interested in keeping their currencies cheap?

pods

bonderøven-farm ass's picture

Spot on, Pods.

For the less cognitively astute,  Meet your Rulers.

Bask in your serfdom, bitchez..... 

Max UK's picture

To Pods,

 

there is a related question going the other way. Why is China accumulating so much gold? Why do Central banks even hold any gold now?

stacking12321's picture

pods,

notice he said gold backed "trade note", not gold backed yuan.

it sounds like something that would be used to facilitate international trade.

if and when we reach a point when everyone has lost faith in fiat, no one will want to accept it for real goods, that would be a good time to step in with a gold backed trade note.

so, plan A is, go along with the western fiat ponzi scheme and reap the benefits of it while you can, but then be ready to jump over to plan B (gold backed trade note) when plan A falls apart.

KnuckleDragger-X's picture

Sheep mostly. The interesting question is what the world economy will look like by October 1, and I'm betting on bad and getting worse.....

FreeShitter's picture

Knowing as we type, these are the good times now.

Dubaibanker's picture

Current constituents of IMF's SDR are going to be third world in the future. The so called other countries that claim to be "developed".

 

thesonandheir's picture

IMF told China not to allow massive spread between CNY/CNH, thats why we saw the PBOC intervention last night.

 

Weightings are interesting, 15% looks ok for first pass. China only has paltry gold reserves but are taking advantage of the suppressed price and market manipulation to accumulate more. Pound and Yen to slowly drop out of favour just to leave big three.

umdesch4's picture

"China only has paltry gold reserves" Are you reading something that's the opposite of everything I've been reading over the last couple of years?

Implied Violins's picture

So the question is, has all of this has been planned ahead of time? What if China depegs from the dollar, floats all their US treasuries, and announces they are sitting on over 30,000 tons of gold? What would be the reaction if that happened?

astoriajoe's picture

Why would the IMF add china when its still semi-pegged to the USD? that's the part that seems so weird to me. 

astoriajoe's picture

Official statistics, I would assume. I'm sure he'll come around. 

Max Steel's picture

Haha I always followed yoir posts on Zh. I knew you're right when you said Yuan will get included ,in IMF SDR. Pata hi tha yeh hoga when IMF changed their date from October 2016 to November 30.

 

 

CHEERS !!

SILVERGEDDON's picture

Okay, wait for it - oops, yet another massive write down in the yuan, timed perfectly for after inclusion in the money basket.

FreeShitter's picture

Now just release the Gold genie.

KnuckleDragger-X's picture

The world economy is too fucked up for gold to have a positive effect. It will take a massive reset and hanging all the Keynesian's from the nearest lamp post before gold and other actual physical reserves to make a comeback.....

ForWhomTheTollBuilds's picture

Yup.  If the world, with its current imbalances converted to a gold standard, the result would be instant collapse about which the hand-tied bankers could do nothing.  Gold would then take the blame for this and the (vindicated) Keynsians would make a stong call to ban gold from everything for good.

 

Best to let the current system collapse on its own with no official gold involvement at all so that even the educated can see things clearly.

Soul Glow's picture

Wow.  China got in the club.  Now for them to tell us how much gold they actually have.

Consuelo's picture

 

 

That doesn't come until U.S. foreign policy has successfully shoehorned both feet in its own mouth.   Which essentially means, could happen at any time...

cheka's picture

this was announced weeks ago.  biggest news in a while.  zh asleep at the switch.  glad to see they finally got around to posting something

Wild Theories's picture

that announced number wasn't widely believed

arbwhore's picture

Just as well nobody else manipulates there currencies.. right? right?

Dr. Bonzo's picture

Complete sham. An entire civilization being bent over and spreading its ass cheeks for this fucking clique of commie geriatrics who have leveraged slave labor and monopoly money to achieve financial status. You still can't convert any fucking yuan freely, anywhere. Yuan market liberalization is a complete fiction. In granting the commies SDR rights, the commies have in effect been given the privilege of slowing down yuan exchange liberalization. The West has capitulated without even firing a goddamned single shit.

Farce of epic proportions.

FreeShitter's picture

SDR will be the newer, more sinister ponzi after the death of the soon to be dollar. Epic fuckery upon humanity  indeed.

LawsofPhysics's picture

Yes, but this time we are talking about GLOBAL Weimar!!
hedge accordingly.

Chupacabra-322's picture

At the highest Compartmentalized Levels, "they're all in on it."

Let the mayhem begin.

Skateboarder's picture

SDR will likely be unleashed after the 2020 US election time frame. Hitlery will ride out the next presidency, hammering the final nails in the dollar's coffin.

A violent nation-state currency death, anywhere in the world, is not needed, as the parallel SDR mechanism, likely cashless, will be implemented in the "hey, we live in a global village, and it's time to get everybody on board for a new seamless world - hooray" push.

edit: LoP - there is much to lose for everyone in the global Weimar situation. In my opinion, the overlords will try to avoid it by using something like the SDR as the transitional and digital-only currency to be rolled out worldwide.

Amun's picture

SDR will likely be unleashed after the 2020 US election time frame

This is what I would call a controlled nuclear reaction with all the necessary attributes of the Soros-Popper "incremental changes" methodology - concentration camps, gold requisition, cash deposits confiscations, fire arms confiscations and so on....

 

But what about un-controlled (still nuclear) social disorder reaction?

LawsofPhysics's picture

Approaching 8 billion souls, all competing for the resources required to maintain a decent standard of living...

you sir, are an optimist. Although it remains hidden, for now, the real cost of the entitlements and government liabilities continues to grow exponentially (just like the population - duh)

Unless soylent green becomes a reality, the producers of essential goods, services, and commodities will not be able to deliver (regardless of the "official" price and regardless of the bullshit FIAT/DIGITS).

Evolve or die motherfuckers, been this way since the dawn of time.

< sigh > same as it ever was...

Skateboarder's picture

@Amun: Great descriptional labels in distinguishing the two types of reactions. The latter, the un-controlled social disorder reaction, may be expected sooner than later as a result from the strife that is stirred up by state-sponsored things like terrizzm and refugee-import. Factors affecting the culture (or lack of) and the physical habitat of communities, like what is happening in Europe (the Sweden article running parallel to the present reading comes to mind) and the USA certainly creates a sense of helplessness and dislocation in a person. Fiscally, populations all across the world are too compliant to rebel, in my opinion. The death by a thousand pricks or the boiling frog analogy applies all too well in the fiscal sense.

@LoP - <sigh> indeed. Sometimes I get all optimistic thinking that the can might be kicked further than any of us can imagine it being kicked. Perhaps I'm not shitting myself, and we will still be here in 2020, shaking our heads in disgust. But for now... you caught me. ;-)

hmn's picture

Manipulation is everywhere.  Buy the dip.  Easy money.  Fed and ECB have your back.

cheka's picture

fed is ecb.  see 2008 bailouts and currency swaps

LawsofPhysics's picture

LOL! What part of ALL fiat will die, don't people understand?

Catullus's picture

How do you include a currency into a basket of other currencies when that currency is pegged to the dollar? It's just allowing for continued liquidation of yuan back into dollars at a fixed percentage. A peg of a peg.

LawsofPhysics's picture

Stabilateeeeeeeee!

Argenta's picture

Soon the destruction of the dollar will be complete.  Glad to see people are rushing to the safe haven bonds represent and ditching the barbarous relics otherwise known as precious metals.  What could go wrong with that scenario?

-Argenta