What you need to know about china’s inclusion in imf currency basket – marketwatch

The International Monetary Fund’s executive board on Monday decided to include the Chinese yuan—also known as the renminbi—in its Special Drawing Rights basket. Msci europe index ticker The decision was widely expected after the organization’s staff recommended inclusion a few weeks ago.

But the significance of this decision is still unclear to many, partly due to the complexity of the forces that government international reserves, and partly because the SDR’s role in the global economy isn’t widely understood.

Special Drawing Rights are an artificial reserve asset created for central banks in the late 1960s, and as such, they’re largely a relic of the Bretton Woods era.

When first introduced, SDRs were meant to rectify a shortage of two important international reserve assets: gold and the U.S. Msci index ticker dollar. Msci world local currency But its usefulness was greatly diminished by the fall of Bretton Woods, and the increasing availability of credit through international financial institutions.

Central banks don’t use the SDR as a yardstick for determining the composition of their foreign-currency reserves.

Db x trackers msci world index ucit These are much more heavily influenced by cross-border trade, said Karthik Sankaran, a director of global strategy at Eurasia Group.

An analysis of the most recent IMF data on central-bank reserves shows that the dollar comprises a much larger percentage of global central-bank reserves than its SDR weighting would suggest. Barra msci The SDR weightings are set every day by the IMF.

Here’s blogger Macro Man’s side-by-side comparison of SDR weightings versus reserve holdings by central banks, as represented by COFER, or composition of official foreign exchange:

Central banks have already started to accumulate yuan reserves to reflect China’s dominant role in cross-border trade—but this has been limited by continued Chinese government controls over the currency and yuan-denominated debt.

So most currency strategists believe the yuan’s inclusion in the SDR basket won’t significantly increase central-bank demand for yuan. Msci indice Actually, the decision has little real significance outside of China.

“It’s not like the SDR is the MSCI world index, where if a company is included, a bunch of portfolio managers need to go out and buy it,” said Greg Anderson, global head of currency strategy at BMO Capital Markets. What is the msci eafe index “This is about prestige, really.” Will the yuan dethrone ‘king dollar’?

The yuan’s inclusion in the SDR basket will bolster its reputation as a global reserve currency. Msci world dividend yield But regardless of Monday’s decision, it’s far from challenging the dollar’s roll as the world’s premier reserve currency.

The yuan is only the fifth most-used currency for settling international payments, according to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which tracks the yuan. Msci world quality index etf Only a fraction of global central-bank reserves are denominated in yuan.

This will likely change as China lifts its controls on the currency’s valuation and usage. Msci world index fact sheet In August, policy makers abruptly shifted their methodology for setting the onshore yuan’s daily reference rate to a more markets-based approach, which led to a sharp depreciation in the currency. Msci emerging markets index etf Though many restrictions on capital flows remain, policy makers have begun to unwind some of these restrictions.

Daragh Maher, U.S. Msci index announcements head of currency strategy at HSBC, believes that as China opens its economy and capital account, the share of international reserves denominated in yuan will continue to grow. Msci index definition But he said he couldn’t envision the Chinese currency supplanting the dollar any time soon.

Chinese policy makers have repeatedly assured the world that they plan to slowly relinquish control over the yuan. Ishares msci world index Measures to open markets over the past year have apparently been sufficient to allow the currency to meet the IMF’s definition of “freely usable”—a requirement for inclusion in the SDR.

But now that China has achieved its goal of SDR inclusion, many market strategists—and U.S. Msci world usd policy makers—are worried that China will reverse course.

But Sankaran believes China will continue with gradual liberalization, because it’s in their interest to do so. Www msci com The country has a large stock of private savings that is currently largely invested either in domestic equities or real estate, creating problems with overvaluation. Msci emerging markets index country weights Broadening the palette of investment options makes sense, provided this is done through institutional channels, limiting the risk of individual flight. Msci world index ytd How does the U.S. Msci world quality etf feel about this?

Over the past two decades, U.S. Msci world net returns lawmakers have often accused China of manipulating its currency to keep it artificially weak, making the country’s exports more competitive and contributing to the country’s rapid growth.

Back in the spring, Treasury Secretary Jacob Lew said he believed the yuan was unfit for inclusion in the SDR, saying the country needed to further ease restrictions in its currency to meet the criteria of “freely usable.”