Chinese Yuan Bullish Following Acceptance into IMF SDR

As was expected, the International Monetary Fund (IMF) granted Chinese Yuan reserve asset status.

Effective October 1, 2016, the Chinese Yuan, also known as the “people’s currency” or the renminbi will become part of the Special Drawing Rights, the benchmark currency basket of the IMF.

This recommendation was made on November 13, after IMF Managing Director, Christine Lagarde, and her staff noted that “this reserve-currency status is an acknowledgment of the progress China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan.”

The decision was made and announced on November, 30.

With the second largest economy in the world, China’s Yuan now sits alongside the USD, EUR, GBP and JPY – a symbolic victory and endorsement for China.

For 22 years, this achievement has been a long term aspiration and hard-fought effort of the Communist Party.

China is the second largest economy in the world, only after the US, but is arguably the most important economy in terms of global trade. Even without the IMF's official status the Yuan mas managed to become the fourth most-used payments currency, about 2.79% of the total, according to the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

Through its own efforts, China has effectively made the Yuan a freely used currency for trade and foreign exchange transactions with agreements with central banks of Britain, Canada and other countries.

On its own standing, the IMF Special Drawing Rights has no strong influence or link to global finance markets or private entities; nonetheless, the measurement of this achievement is based on future possibilities.

Through IMF’s persuasion and also by virtue of the Yuan’s new status investors may become more comfortable playing in China’s markets, once accompanied by more transparency.

If investor sentiment mollifies towards Chinese markets, this is turn can encourage China’s leaders to become more open in their policies and desist, or at least greatly limit, its currency manipulations.

Of course, this is a “wait and see” scenario.

What is certain is that the new status granted by the IMF is likely to increase demand for the yuan.

The Yuan’s new status is likely to increase demand for the currency and other Yuan-denominated assets.

Currency analysts estimate the IMF seal of approval could fuel demand worth more than $500 billion in coming years and take the yuan's share of global reserve holdings to around 5 percent, overtaking the Canadian and Australian dollars.