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Chinese yuan's SDR entry to spur central banks to raise RMB holdings

Chinese yuan's SDR entry to spur central banks to raise RMB holdings

A move by the International Monetary Fund to include the Chinese yuan into the IMF's reserve basket -- the Special Drawing Rights (SDRs) -- on Nov. 30 is expected to prompt central banks in the world to raise the Chinese currency in their portfolios, Standard Chartered Bank said Tuesday.

Standard Chartered Bank said that central banks in the world could raise their yuan holdings by US$85 billion-US$125 billion worth of the Chinese currency in 2016 with the Chinese unit's entry into the SDRs scheduled to take effect on Oct. 1 that year.

The SDRs, created by the IMF in 1969, is intended to supplement IMF member countries' reserves. Before the inclusion of the yuan, the value of the SDR is currently based on the value of four key currencies: the U.S. dollar, the euro, the Japanese yen, and the British pound.

After the yuan's inclusion into the IMF's reserve currencies, the currency's weighting in the SDRs will hit 10.92 percent, while the weighting of the U.S. dollar, the euro, the yen and the pound will be diluted to 41.73 percent, 30.93 percent, 8.33 percent, and 8.09 percent, respectively.

Standard Chartered Bank said that after the yuan's inclusion into the SDRs, authorities in China are expected to introduce more measures to facilitate flows of the yuan, such as liberalization of cross-border investments and currency remittances, while China is expected to further relax rules governing its capital account.

The British bank said that China is also expected to speed up its pace in developing free trade zone investments in a bid to further boost flows of the yuan, adding that the inclusion of the yuan into the SDRs could reinforce the Chinese yuan's globalization in the world market.

The trend for central banks to raise their holdings in the yuan will continue and by the end of 2020, the Chinese unit is expected to account for no less than 5 percent of central banks' reserves worldwide and become the third most used currency in the world after the U.S. dollar and euro.

For its part, Taipei-based Yuanta Securities Investment Trust said that the People's Bank of China (PBOC), the Chinese central bank, is expected to gear up to sign currency swap agreements with its foreign counterparts and set up offshore settlement banks for the yuan in a bid to expand the use of the Chinese yuan.

Yunata Securities Investment Trust said that while the PBOC has an intent to stabilize the value of the yuan, the U.S. Federal Reserve is expected to kick off an interest rate hike cycle, likely in December, prompting foreign investors to move funds out of the region, potentially causing the Chinese unit to trend lower down the road.

However, the investment trust firm said that to reinforce the market's confidence in the yuan, the PBOC is expected to continue its intervention in the value of the yuan for the sake of the currency's stabilization.


Updated : 2021-09-25 18:04 GMT+08:00