It is official. The Chinese yuan will be in the SDR. At a 10.4% share, it is a bit more than I expected, but less that the 14%-16% share that the IMF staff has intimated a few months ago. This is a significant event, even if there is no short-term market opportunity.
The yuan’s exchange rate against the dollar has steadily declined over the month of November contrary to conspiracy theories that warned Chinese officials would devalue the yuan only after it joined the SDR. It is did not wait.
Other conspiracy theorists note the long transition period before the new SDR basket is launched. What was announced 30 November 2015 will not be implemented until 1 October 2016.Much can happen before then. Some wonder if China faces a repeat of the market turmoil seen this past July-August, or worse, officials may backtrack on some of the very reforms that facilitated its ascension to the SDR in the first place.
Being invited to join and then at the last minutes reneging would be the ultimate insult to the organization that has failed to reform and give some of the large developing economies, like China, a greater quota (weighted votes).
That speculation is a bit over the top. China has been pressing to join the SDR. To refuse to join would be to shoot itself in the foot. It is true that many developing countries have been critical of the IMF for its actions in the 1997-1998 Asian Financial Crisis, and for what many perceive its relative leniency and over-commitment of resources to relatively high income countries in Europe.
Joining the SDR is a sign of the rise of China, and the West’s recognition of this, more than an accelerant of the yuan’s internationalization.After all, the yen has been in the SDR since it was launched and yet the its international use remains quite limited, and as a reserve asset, it is quite minor.
The SDR is a peculiar form of money. It does not circulate. It cannot be used to buy goods or services or financial assets. It is official money, and serves the function as a unit of account. It is also accepted as a means of payment for official-to-official transactions. It is not so much a store of value, and there are no bonds or stocks that trade denominated in SDRs.
