People stand outside a foreign exchange store in Shanghai, China, December 1, 2015. REUTERS/Aly Song
KUALA LUMPUR: The International Monetary Fund's (IMF's) widely expected inclusion of the Chinese yuan into its Special Drawing Rights (SDR) basket is only the critical first step in the currency's path to full internalisation, Standard & Poor's Ratings Service said.
"The inclusion of the yuan in the SDR basket was a tectonic change, but the big task facing the Chinese authorities is to convince the private sector to hold yuan for reasons other than trade facilitation," said S&P Asia-Pacific chief economist Paul Gruenwald on Tuesday.
“As of now, the yuan is largely a trade currency, with minimal private holdings for store-of-value reasons. Liquidity is guaranteed for official sector trades under the People's Bank of China's bilateral swap agreements with various central banks.
“No such guarantees exist for the private sector, which is therefore at the mercy of any market interventions by the authorities. If markets trust the PBOC, then this is not a serious issue. But we are not there yet,” he said.
Gruenwald’s remarks were contained in a report published on Tuesday entitled “IMF inclusion of the Chinese Yuan in the SDR basket is a momentous non-event",
He said the Chinese authorities have received a shot in the arm and an important vote of confidence from the IMF.
“But private markets are a whole, new challenge: they have a lot of convincing to do," said Gruenwald.
The S&P pointed out that measuring whether the market ascribes reserve status to the yuan (or alternatively, that it trusts the PBOC) or not is tricky.
"We propose a simple, observable test. Traders and fund managers flock to reserve currencies in times of market stress. So if the yuan is perceived as a reserve currency, then it should strengthen during such volatile times," said Gruenwald.
Effective from Oct 1, 2016, the yuan will join the US dollar, the euro, the British pound, and the Japanese yen in the SDR basket. The IMF announced on Monday the yuan will have a 10.9% weight, which was somewhat lower than originally anticipated.
As part of its review, the IMF Board implemented a new formula for SDR weights, increasing the importance of financial variables, where China is relatively weak; its strengths are the size of GDP and the share of global trade. The US dollar, in contrast, is relatively strong in financial variables given its global reserve currency status.
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