From Capital Economics:
The IMF’s decision to include the renminbi in the SDR basket will not directly increase demand for renminbi assets. The implicit endorsement of the renminbi as a reserve asset is unlikely to sway the decisions of global asset managers either. Indeed, China’s market interventions this year in response to capital outflows and the equity bubble’s collapse provide strong reasons for them to steer well clear.
Much of the commentary about the IMF’s decision (which was all but confirmed on Friday) has been marred by misunderstandings of the role the SDR performs. Our Global Economics Focus, “China and the SDR”, published on 26th May, provides a clear overview. In brief, the SDR is the unit of account used within the IMF. Its value is determined as a weighted average of the basket currencies (currently the dollar, euro, yen and sterling).
IMF members hold balances denominated in SDRs. If any are facing balance of payments strains they can sell SDRs to other members in exchange for any of the currencies in the basket. In this way, SDRs are a supplementary reserve asset, giving access to reserve currencies. In normal circumstances though, there is no boost in demand for a currency simply because it is in the SDR basket.
A second misconception is that membership of the basket determines “reserve currency status”. On this basis neither the Australian nor Canadian dollars would be reserve assets though in fact they each account for 1.9% of global reserves for which a currency breakdown is available.
In practice, what determines whether central banks are willing to consider a currency a reserve asset is their confidence that they can sell that asset whenever needed into deep and liquid markets. Inclusion in the SDR basket could be taken as endorsement by the IMF that the renminbi and China’s financial markets meet this standard. But central banks are likely to come to their own judgement (as they have in their purchases of Australian and Canadian dollar reserves).
But the Battler is a global reserve currency, damn it!
